Gold update: Fed and ECB raise interest rates by 25 basis points

This week, both the Fed and the ECB raised interest rates by 25 basis points. The Fed has raised interest rates 11 times since March of 2022. Interest rates in the US are now 5.25%. This is the highest level in 22 years.

The ECB started raising interest rates in July 2022. In total, interest rates have been increased 9 times. Interest rates in the eurozone have risen by 4.25% in one year. Interest rates are now at the same level as in 2000.

Interest rate hikes to curb inflation

Central banks raise interest rates when inflation rises too fast. The main focus is on core inflation. Core inflation is inflation without the cost of food and energy.

Core inflation in the US rose slightly less rapidly in June than a year earlier. On an annual basis, core inflation was 4.1% versus 4.6% in May. This is one of the most important numbers that the Fed targets. In the US, interest rates are now above core inflation. In Europe, core inflation rose to 5.4% in June. In May, core inflation was 5.3%.

Both the ECB and the Fed will again have the opportunity to raise interest rates in mid-September. The probability of this happening depends on inflation data in the coming months. In addition, the situation in the labor market will play an important role.

Industry is shrinking, especially in Germany

This week, preliminary purchasing managers’ indices for manufacturing in the eurozone showed a stronger contraction. The index fell to 48.9 in July, which is the lowest level in eight months. An index below 50 indicates contraction and a number above 50 indicates growth.

The purchasing managers’ index for manufacturing in Germany, Europe’s largest economy, even fell to 38.8. The industry in Germany is showing a serious decline. Economic industrial contraction is in full swing here.

Gold price rises nearly 1.0%

The dollar index has risen due to the interest rate hike by the Fed. Two weeks ago, the Dollar Index fell below 100 points, the lowest level since March 2022. This week the index closed at 101.45. The Dollar Index compares the US dollar against a basket of foreign currencies.

The price of gold generally rises when the US dollar falls. Gold has held steady this week at $1960 per troy ounce. In euros, the gold price increased by €448 per kg, which is 0.8%. In 2023, gold is up 4.5%. The silver price did not move this week in euros. In US dollars, the silver price fell by 1.1%. The gold-silver ratio is 1/80.

Agenda

This Friday there is an important figure on unemployment in the US. The job figures for July will be announced at 2.30 pm. The June figure was worse than expected while previous months’ figures were stronger than consensus. Interest rate hikes now appear to be gaining traction in the US labor market. If the figure for July is also disappointing, the chance of an interest rate hike in mid-September will decrease. And that is ultimately positive for an investment in gold and silver.