However, if expectations remain divided with both the market discounting and analyst forecasts indicating below 50% probability of a rate rise going into the meeting, a rate increase in Sept seems unlikely. Gold is highly sensitive to rising USA interest rates, as these increase the opportunity cost of holding non-yielding bullion, while boosting the dollar, in which it is priced.
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In Asia, shares oscillated between gains and losses on Wednesday in morning session, with Japanese stocks wiping out a monthly decline in response to weaker yen, amid expectations for an increase in U.S. interest rates this year.
“If these projections are accurate, then a monetary policy created to track the rise in r-star (natural rate) would imply a very gradual normalization of the federal funds rate”, the note said. “Still, the macro will play a key role in price fluctuations so we will pay a close attention to Fed rhetoric as well as forthcoming Chinese PMIs, which should have an impact on overall risk-sentiment”.
But the market’s reaction to these comments suggests that investors are wary of trusting the Fed. Holdings in gold ETFs rose about 25 metric tons this month, the smallest gain in 2016. USA stocks, meanwhile, have hovered near record highs, even though higher rates would, in theory, weigh on US shares. The 10-year Treasury note saw it’s yield fall by 6.5 basis points Monday, the largest one-day fall in seven weeks. USA gold futures were up $1 at $1,317.50. The Nasdaq Composite closed down 9.34 points, or 0.18 per cent, at 5,222.99.
The greenback USDJPY, +0.10% has shed almost 15% of its value against the Japanese yen, considered a safety play, over the same time. GDP figures for June that are also set for release on Wednesday are expected to show growth picked up by 0.4 percent, which should bolster expectations that the economy will rebound in the third quarter.
Fed fund futures signal 34 percent odds of tighter policy at the September 20-21 meeting, according to data compiled by Bloomberg.
These reactions aren’t surprising, strategists said.
With a tsunami of inflation heading the way of the US, it may be unlikely that the Fed will slash rates to negative territory. “People need to go back to basicsand. have lower beta portfolios”.
Dutta suggested that a stellar non-farm payrolls print on Friday in the neighborhood of the previous two reports would likely elicit a rate increase in September, thereby proving Fischer right in the end -but cautioned that this would be hard to come by. Oversupply remained a major concern with USA crude stockpiles forecast to have risen by 1.3 million barrels last week, a Reuters poll showed.
Credit conditions have tightened, thanks to the rise in Libor.
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Two-year Treasury notes are on pace for their worst monthly performance since November as traders add to bets that the Federal Reserve will increase interest rates as soon as next month.
