Hawkish Fed, other bearish factors hurting gold

Weak looking spot gold recovered on Thursday and Friday ahead of the key US PCE inflation data due Friday. Spot gold managed to recover nearly 2% from the weekly low of $2293 as it rallied to $2339 level; however, the metal gave back some of its gains on the much awaited US PCE inflation data (May) coming in line with the forecast. The yellow metal closed with a loss of $1 at $2326 on Friday; it was up nearly 0.30% on the week though.

The US Dollar Index gained further ground on Trump gaining an edge over Biden in the presidential debate Friday, though it gave back some of its gains on healthy risk appetite. The Index closed with a loss of 0.04% at 105.84 on Friday; it was up around 0.04% on the week. The ten-year US yields at 4.38% were up 2.28% on the day and were up around 4% on the week. The two-year yields were up 0.20% on the week as they closed around 4.75%.

FedspeakFed officials continue to hold a calibrated hawkish stance as they have been indicating that they are in no hurry to cut rates and they essentially want more evidence on inflation moving towards the Fed’s goal of 2%.

Data round-up

The US Q1 GDP data (Q1 annualized q-o-q final reading) matched the forecast of 1.4% and was above the initial estimate of 1.30% but personal consumption was revised lower to 2% from 1.50% estimated earlier. The PCE deflator inflation data (May) released Friday were in line with the expectations, though the data showed that the Fed’s preferred inflation metric eased from May. Personal income was better than expected but spending lagged. University of Michigan and CB confidence topped the respective forecasts as inflation expectations eased. Weekly job and Chicago PMI data turned out to be better than expected.

The CPI inflation data of Australia, Japan and Canada, reported this week, were hotter than expected, which puts the disinflation theme at a risk.Data and events next weekTraders look forward to the French election, UK election, JOLTs job openings, ISM manufacturing, ISM services and nonfarm payroll report.OutlookBased on regional Fed surveys and Conference Board confidence data the upcoming nonfarm payroll report is expected to reflect a strong job market. S&P Global US PMIs data have been strong;thus, US ISM PMIs are expected to be robust. The French election results are likely to affirm the rise of far-right political ideology, which will be positive for the US Dollar, though a possibility of dip in the US yields will mitigate the impact to some extent. The Fedspeak remains hawkish; thus, the Fed Chair Powell’s speech will be crucial. Inflation is proving to be sticky in developed economies. In this scenario, the yellow metal is expected to fall unless Powell unexpectedly becomes dovish yet again. Selling into rallies is preferred in the short term.Support is at $2300/$2277. Resistance is at $2350/$2370/$2385.

(The author is Associate Vice President, Fundamental Currencies and Commodities at Sharekhan by BNP Paribas)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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