*IMF thinks that the dollar is overvalued by 6-12% * Fed may cut interest rate by 25 basis point
Gold price has seen some remarkable recovery this year, it is up nearly 11.07% year to date. In other words, it is up approx. 13.65% from its low of $1,266 formed back in May. However, the price is still well below the all-time high of $1,921 formed back in September 2011. In our last article, we talked about the possibility of gold price touching the level of 1,550 and it seems that both fundamental and technical aspects are still supporting this bull case.
This is because fairly recently, the IMF has said that the US dollar is overvalued by 6 to 12% (6% drop in the dollar index price = 91.27 approx.) given the economic fundamentals. It was only a few weeks ago when the dollar index touched the low of 95.84, but ever since the price has been in an upward trend. The IMF’s comments have brought some weakness in the dollar index, it is trading lower by 0.18 percent or at 97.04 today. It is this weakness in the dollar index which is helping gold price to shine.
All eyes are on the upcoming Fed meeting (31st July). Majority of the Fed committee members agree that interest rate cut is required to support inflation. Although, San Francisco Fed president Marry Daily did say yesterday that she hasn't made her mind yet in relation to her next move on monetary policy. During the Fed’s last meeting in June, Jerome Powell, the Fed chairman, said he would act “as appropriate” to revive the economy. For Traders, this message was that the Fed is still data dependent. Looking at the two most important economic numbers: the US NFP and US Retail Sales, both numbers say that the economy isn't really in a dire condition.
This leads me to believe that there are 75% chances that the Fed may cut the interest rate by only 25 basis points during their upcoming meeting and another 25 basis points interest cut for the rest of this year. The chance for 50 basis points interest rate cut during this meeting is only 15% and 10% for no action. The 25 basis point interest rate cut is largely priced into the gold price. Having said this, this doesn't mean that the gold price isn't going to continue it's moved to the upside. Between now and the 31st of July, several different Fed members are scheduled to speak, and this means that speculators are going to use this opportunity to push the gold price higher.
Also, remember Donald Trump, the US president, is also pushing for the dovish monetary policy for a while and he has set things in motion by electing the people in the federal Reserve who will help to shape that. So, I think the long term trend for the gold is skewed to the upside and any short term retracements in the price could provide an opportunity to join the trend.
For traders who like technical analysis, it appears that a bull flag pattern has formed as shown in the chart below, and given that the price is trading above all the important moving averages (50,100,200), it is highly likely that the price may continue its move to the upside. Interestingly, the projection of this pattern throws the price near the 1,550 mark which is only 7.95% appreciation in the gold price.
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