Gold price recouped losses and hit one-week high after Fed chairman Jerome Powell gave strong signals of an impending cut in benchmark interest rate later this month. Gold price skyrocketed in June after remaining range bound in the first five months of this year. The rally was primarily driven by three macro factors — a dovish Fed and other major central banks, trade-related conflict across the world and fears of a global economic slowdown.
Fed Signals an Impending Rate Cut
On Jul 10, in a testimony to the House Financial Services Committee, Powell said that the United States is suffering from a bout of uncertainty caused by trade tensions and weak global growth. He added “Crosscurrents have reemerged. Many FOMC participants saw that the case for a somewhat more accommodative monetary policy had strengthened.”
Per Powell, a series of recently released economic data and developments indicate that tensions related to world trade and global economy will continue to weigh on the U.S. economic outlook.
The Fed chair noted that while the U.S. jobs market remains robust and consumer spending may have rebounded in the second quarter, business investment, housing investment and manufacturing output weakened considerably. Inflation is likely to stay below the Fed’s 2% target rate for the time being.
Powell reiterated Fed’s commitment to act as appropriate to sustain U.S. economic expansion, providing a clear message for a rate cut possibly in the upcoming FOMC meeting scheduled on Jul 30 – 31. At present, 100% respondents of CME FedWatch are expecting a 25 basis-point reduction in interest rate in July.
U.S. Dollar Price Declines, Government Bond Yield Rises
Powell’s Congressional testimony, the ICE (NYSE:) (DXY), which measures the greenback’s strength against a basket of six major currencies, fell 0.4% to 96.83 after closing at 96.91. Expectation of low interest rate made U.S. dollar less attractive to