Market Analysis and Interest Rates

Every now and then, we see different movements

within the markets.

If we go back a month or two,

the markets were pricing in interest rate hikes

in September by 80%,

because inflation or economic data

was supporting this.

Recently, after the release of employment data,

inflation data,

and today's PPI data,

which are somewhat negative for the dollar,

the markets scaled back their pricing

for an interest rate hike

to less than 50%.

And this is the trend I support this year,

because if we look,

previously, we had a barrel of oil

priced at $120 or $125.

Currently, a barrel of oil is approximately

between $70 and $80.

And I don't think there will be any need

for further hikes in the coming period.

For this reason, I somewhat support

not having any interest rate hikes,

and inflation somewhat declining in the US.

And this is what the markets are pricing in.

Okay, what does that mean for gold?

Before you answer me, Jad...

I am now looking at the graph

or the gold chart.

In today's session, we reached $4,079.

If we could take a look at gold trading now,

because the narrative is when we see investors scaling back

the probability of the Fed raising interest rates,

and also a decline in the dollar,

and also a decline in US bond yields.

This is what I expect to give us a rebound for gold,

but it is not a very strong rebound.

Jad, gold is trading at $4,064.

I was expecting us to see $4,100 again

after the PPI numbers.

Why didn't that happen?

For me, it is just a matter of time.

If we look at the chart or the graph,

we see that gold, at the 4,000 level,

is forming some kind of price base

in preparation to launch again.

The data and the impact we are talking about

do not actually have an immediate effect.

Yes, we saw the rise,

but this rise supports the positive outlook.

for the next phase in the medium and long term.

True, we saw the $4,100 level,

but I expect that within a week or two

we will see it above the $4,100 level,

because the worst fundamentals

will support the negative dollar and negative US bond yields.

So, in my opinion, gold is currently

preparing a major base around the 4,000 level,

in preparation to launch towards 4,400 and 4,700.

4,700. What are the risks?

The risks against gold reaching 4,700?

I mean, what could prevent gold from reaching 4,700?

In my opinion, two main things:

the possibility of war returning again,

and not just the skirmishes we are currently witnessing,

but a full-scale war.

And the second possibility is the return of market pricing

for interest rate hikes,

which would put negative pressure on gold.

If these two factors disappear,

if these two factors disappear,

they will not have a negative impact on gold.

On the contrary, they will have a positive impact

in the medium to long term,

because policy, first of all, supports this.

And secondly, regarding the war,

the markets will not adapt as they did in the Russia-Ukraine war.

The markets adapted to the situation.

If talk about the skirmishes between Iran and America takes off,

the markets, in one way or another, will adapt,

and their main focus will shift to US policy, not the war.

Let's look at the Fed today.

Its meeting is at the end of this month.

We see oil price movements throughout the month of June.

Practically, in June, we dropped from 97 dollars,

let's say 98 dollars,

to levels that reached 72 dollars by the end of June.

Well, what I'm seeing now is that we are rebounding upwards again.

I mean, Brent is now at 84 dollars and 61 cents.

And what contributed to lowering inflation in America in June was energy.

Energy in the CPI actually dropped by 5.7%.

This was the largest monthly decline since April 2020.

Well, today, with oil prices rising again,

is it possible that inflation won't stay at these levels

and will start rising once more?

And we go back to square one, that the Fed must raise interest rates?

Indeed, this is a very strong possibility.

That is why we are seeing that a single data point

is not enough to determine the path of monetary policy for the next phase.

We still have about two months

of economic data before the actual decision.

So, if we go back a little bit,

oil declined and closed the price gap from the war

and formed a price base there.

When the skirmishes began, or the breakdown of the MoU

between Iran and the US,

and we had a return of the blockade at sea

and some sort of disruption to supplies,

we saw oil prices rise again.

Okay, so if the price of a barrel is around $80,

will it significantly affect the return of rising inflation?

In my opinion, no.

When might we see the real impact?

When oil prices return to levels above $100.

Only then can we talk about

the possibility of inflation rising again

and a change in the Fed's decision.

In terms of interest rates,

or at least in terms of market pricing,

because we had an interest rate hike,

usually, for such an oil barrel at $70 or $80,

I believe it will be acceptable for inflation levels.

They said the Fed wouldn't take action in terms of

raising the interest rate.

We also need to look at employment,

at the CPIs.

All these numbers were negative and are still negative.

There is no need for us to have an interest rate hike.

Anyway, now

market expectations for a rate hike in July

are dropping to 17% from nearly 50%

in yesterday's session.

Thank you very much, Jad Hariri,

Financial Markets Strategist

at First Financial Markets.