Fed Comments Send Gold to New Six Year High

The outcome of the Tory leadership contest has almost reached its conclusion and by this

time next week the new Prime Minister will be in office with new cabinet also likely in place.

Relatively soon after that the truth will soon be known as to whether or not any of this will

actually make any difference to the ultimate conclusion. Naturally, the major risk is that it

will not, and the UK will once again fumble its way inconclusively, towards another Brexit

deadline.

Meanwhile, the GBPUSD has managed to recover from a fresh one-year low of 1.2382

posted earlier this week, to back above 1.2525 this morning. The price did lift to as high as

1.2558 last night, but it has backed off a little as markets reopen this morning. The most

likely reason for the rebound looks linked to profit taking on short positons ahead of the

Tory leadership result. Outside of that, and a slight relapse for the dollar yesterday, I see

little reason yet to get particularly excited about the upside prospects for the pound.

Elsewhere equity markets got a lift from comments by the Fed’s John Williams yesterday

who made some very dovish remarks regarding the need for an immediate 50bp rate cut.

His comments were later downplayed by the New York Fed, but that hasn’t dented the

rebound and also helped Asian markets move higher today, led by around a 2% gain for the

Nikkei.

What William’s comments have achieved is a change in odds for the Fed to lower rates at

the end of the month. The consensus now is that the Fed will lower rates by 25bp. The

result of that consensus shift has most readily showed up in gold with the price rising to

above $1450 yesterday evening- a fresh 6year high. Clearly gold doesn’t need to many

excuses still and yesterday’s comments from Williams provided just the right catalyst for

further gains. However, and irrespective of that, I stand by what I wrote at the start of the

week where I argued the case for the Fed to remain on hold on July 31.

Moreover, the surge in the gold price in recent weeks has it roots in a combination of

drivers and not just the prospect of the Fed lowering rates. The stronger JPY and

continuation of the bond market rally are very much at the heart of this move, but clearly

the risk dynamics are somewhat distorted because with US equity markets at, or near

record highs, no argument can be made for risk aversion driving the metal higher.

I suppose the risk for gold is that the Fed doesn’t lower rates and clearly the higher the

metal goes the greater that risk will be. Having said that, the risk aversion that’s been

absent might then show up in the equity space and help offset any interest rate

disappointment. However, beyond any immediate drivers, the longer term risk for gold

surely comes from a significant fallout in global bond markets and as I have noted in

previous articles, that risk is surely rising.

Finally, turning back to the pound this morning, the rebound to above 1.25 may have some

further upside, perhaps beyond 1.26, but anything near 1.27-1.28 looks likely to run into

sellers yet again. As for the GBPEUR, the rebound from around 1.1050, close to 1.1150

overnight and this morning looks like its stalling again ahead of 1.1200-50. As with the GBPUSD, it still looks like there’s an orderly queue looking to lean into any rally and that’s

certainly a tactic that I have, and will continue to employ, until I have reason to change my

long term outlook for the currency.

Important Economic Releases Due Later Today

19/07- 3.00pm US University of Michigan July Consumer Sentiment Index