Precious metals are experiencing volatility this week, with silver in particular seeing some big price swings.

At this time last week, gold was $1,979 per ounce and threatening the key $2,000 per ounce level but has pulled back this week to $1,935 at the time of writing, a drop of over 2%. For silver this has been more pronounced, dropping more than 5.5% from $25.33 to $23.50 currently.

030823 USD Chart

There is plenty going on in financial markets this week, despite the summer months normally resulting in a quieter period so below we have provided a brief summary of some of the key things influencing the financial markets this week.

Rating agency Fitch surprised markets this week by downgrading the US credit rating from AAA to AA+. This comes as US debt is expected to balloon in the coming years, and repeated last minute debt ceiling negotiations that threatens the government’s ability to repay its debts. Reaction has been muted so far however, with some analysts calling the decision confused given the US economy’s current strength. Others consider the decision long overdue given the US government’s growing spending since the outbreak of the pandemic.

Stock markets around the world dropped on the rating downgrade, but the dollar held up well, and stronger than expected job numbers from the US yesterday continue to demonstrate that the US economy is proving resilient to the Fed's ongoing rate hikes. The strength in the jobs market suggests the Fed has room for further hikes if they choose to do so when they meet in September. This pushed the USD index to a 3-week high yesterday and resulted in the large price drops for both gold and silver.

Markets will be watching keenly now for further economic data from the US. Things like jobs, consumer spending and house prices will be key indicators of how the US economy is holding up, and some analysts now believe that America can avoid a recession despite the repeated rate hikes. Inflation will of course be the other main figure to watch for; currently sitting at 3% the Fed look to be close to completing their task, but if the final percentage point needed to hit the target of 2% proves particularly stubborn there could be one final hike to come.

In the UK, the Bank of England followed market expectations with a rate hike of 0.25% points. This takes UK rates to a 15-year high of 5.25%. The BoE doesn’t expect inflation to return to its 2% target until Q2 2025, in bad news for the ongoing cost-of-living crisis. It remains unclear if this will be this peak for UK rates, inflation remains at 7.9%, and unless this starts to come down the BoE will have little choice but to continue to hike.

The rate decision comes as Nationwide reported that July saw the sharpest drop in house prices in 14 years, falling 3.8% year-on-year. The average 2-year fixed mortgage rate is 6.85%, and today’s hike is expected to drive rates higher still. A prolonged period of high inflation and high interest rates means mortgage costs are unlikely to fall much in the next two years and could spell bad news for homeowners faced with fewer buyers and lower asking prices for their properties.

With the hike coming in as expected however Sterling is fairly unmoved today, bringing the UK in line with the US for the next few weeks; trading on key economic figures that indicate whether inflation is falling and how the economy is holding up. The BoE will also be watching these figures closely ahead of their next meeting in seven weeks to decide whether to press ahead with further hikes or pause and signal the peak is in.