- Republican candidate Donald Trump won the election on Wednesday.
- Trump has proposed policy changes that might lead to a spike in inflation.
- Investors are pricing a 98% chance of a 25-bps rate cut on Thursday.
Gold prices plunged to a three-week low on Wednesday after Trump won the US presidential election. Meanwhile, the US dollar surged to a four-month high, making gold more expensive for foreign buyers. However, the market focus has shifted to the upcoming US central bank policy meeting.
Republican candidate Donald Trump won the election on Wednesday, returning to power for a second time. Before the results, it was unclear who would win, so there was some volatility. At some point, Kamala took the lead, weighing on the dollar. However, in the end, Trump had the most votes.
A Trump presidency can hurt and support gold prices. The Republican president has proposed policy changes affecting tariffs, immigration, and taxes that might lead to a spike in inflation. Such an outcome could support the yellow metal, a hedge against inflation.
However, demand for the safe-haven metal might be short-lived if the Fed has to increase interest rates. Higher borrowing costs reduce the appeal of bullion, reducing demand. At the same time, high interest rates boost the greenback, making gold more expensive.
Meanwhile, market participants are also focused on the US economy and the upcoming FOMC policy meeting. Data last week showed a mixed picture of the US economy. However, the nonfarm payroll report showed dismal job growth in October.
US employers hired only 12,000 new workers, compared to expectations of 106,000. This was a massive drop from the previous month when there were over 220,000 new jobs. However, economists had expected slower job growth due to hurricane disruptions.
At the same time, the unemployment rate held steady at 4.1%, reassuring markets that the labor market was still healthy. As a result, Fed rate cut expectations remained mostly unchanged. Investors are pricing a 98% chance of a 25-bps rate cut on Thursday.
Markets have almost entirely priced in Thursday’s rate cut. Therefore, the expected outcome will have little impact on prices.
Fed funds rate (Bloomberg World Interest Rate Probabilities)
However, the messaging during the meeting will shape the outlook for future rate cuts. Futures reflect a drop in rate cut expectations for next year. A dovish tone will solidify bets for a cut in December, boosting gold prices. On the other hand, a cautious tone might increase the likelihood of a pause at the next meeting, weighing on the yellow metal.
