Last week, Boris Johnson became the PM of the UK. The odds of hard Brexit increased, sending pound lower. Now, markets await tomorrow's FOMC meeting. Gold closely monitors these events and thinks about which way to go next.
Boris the Brexiteer
Last week, Alexander Boris de Pfeffel Johnson - for the people of the Great Britain known as Boris Johnson with a funny mop of blonde hair - became the next Prime Minister of the United Kingdom, after Theresa May resigned. And who knows - he might very well be the last prime minister of the Great Britain, as the union comes under increasing internal pressure due to Nicola Sturgeon's push for a second referendum on Scottish independence. Remember, not all constituent parts of the United Kingdom voted for Brexit - the lion's share of that vote came from England.
Initially, the market's reaction was muted as Johnson's appointment as the PM was well telegraphed. But it seems that the market has just realized that the odds of a no-deal Brexit increased with Boris at the helm. Indeed, in his first speech as the prime minister, Johnson said that "We will come out on 31 October, no ifs and no buts. We will do a new deal and a better deal."
Yesterday, Johnson continued, insisting he will not hold Brexit talks with EU leaders unless the bloc lifts its refusal to reopen the existing divorce deal. He said: "what we want to do is to make it absolutely clear that the backstop is no good, it's dead, it's got to go. The Withdrawal Agreement is dead, it's got to go." True, he also added that "but there is scope to do a new deal," but the market focused on the first part.
It means that the UK moved closer to a no-deal exit from the EU. Amid Johnson's remarks, the pound sterling fell by more than 1 percent to €1.10 and $1.22, the lowest against the dollar for 28 months, as the chart below shows..
Chart 1: GBP/USD exchange rate over the last three years.
Implications for Gold
The increased chances of Brexit without any deal seem to be fundamentally the best scenario for gold. As a reminder, uncertainty around Brexit gave gold a strong boost back in 2016. However, Johnson's action could be negative for the gold prices as well, if the Brexit drama strengthens the U.S. dollar against the pound sterling and the euro.
Brexit is not the only hot issue for the markets this week. Today, the trade negotiations between the United States and China resumed, with hopes that the trade war will be finally ended. On Friday, the U.S. Labor Department will release July's non-farm payrolls. The analysts expect 160,000 jobs added. And, of course, the FOMC will publish tomorrow the statement from its July monetary policy meeting.
Let's try to assess the market expectations, staying solely with the fundamentals. The awaited Fed's interest rate cut has created a natural "buy the rumor, sell the news" scenario. So, decline in the gold price is possible after the FOMC meeting, especially if the Fed reduces the federal funds rate by only 25 basis points (or it does not move the interest rates at all). However, a lot will depend on the message accompanying the move. If Powell tries to persuade markets that the cut is just a one-off event, seeing gold reverse its recent gains will be in order. But if the Fed Chair sounds dovish and signals more monetary policy accommodation, that would limit any fall in gold prices.
History teaches us that the upcoming interest rate cut won't likely be a separate event, but the beginning of a rate cutting cycle. However, we are of the opinion that the Fed will act less aggressively than markets are pricing in. They see at least three rate cuts by December, while for us the Fed will not deliver more than two. After all, the economic data themselves do not justify aggressive slashing of interest rates. Actually, the GDP expanded 2.1 percent in the second quarter, beating economist expectations. So, gold bulls look set to be disappointed tomorrow. Stay tuned!
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
Thank you.
Arkadiusz Sieron
Sunshine Profits' Gold News Monitor and Gold Market Overview Editor
