Spot gold closed with a weekly gain of nearly 0.10% at $1948.46.
The major driving theme of the financial markets, though it emerged late, in the week ending June 2 was a quick shift in notion about the possible monetary policy path of the Federal Reserve.
Odds on bets for the Federal Reserve doing a 25-bps rate hike in its upcoming June meeting are changing rapidly.
Odds of a rate hike in June, which stood at only 10% in June merely ten days ago, rose to 70% at the beginning of the week on hawkish Federal Reserve speakers; however, later, with the Fed’s Jefferson and Harker unexpectedly leaning towards a skip in June, odds fell below 30%, which boosted the US treasuries.
The US bond yields dipped further as a debt deal agreement was signed by the House. These developments benefited gold, too.
The US nonfarm payroll report released Friday was a mixed bag: US employers added 3,39,000 jobs as against the forecast of 1,95,000. Two-month payroll net revision added 93,000 jobs.
On the flip side, the unemployment rate rose to 3.70% from 3.40% in April; average hourly earnings y-o-y rose by 4.30% vs the estimate of 4.40%; average weekly hours all employees slipped to 34.30 from 34.40 in April, which will translate into a huge loss of manhours.Nonetheless, robust headline figures boosted bond yields and the Dollar Index, which weighed heavily on the yellow metal as it crashed 1.53% on the last trading day of the week.
The US Dollar Index was down about 0.20% on the week as it closed at 104.04. The Index recorded its peak at 104.70. Two-year yields at 4.561% were down nearly 1.10% on the week.
Next week, investors will focus on ISM non-manufacturing PMI data (due on June 5) for May.
It is to be noted that the Federal Reserve speakers expressing their preference for a skip in June has made the market participants cement their expectations of a skip in June, which has made the US Dollar vulnerable.
Although, after the release of the NFP report, the rate hike probability for June has risen to 40% from 30%, it is still considerably down from 70% seen before the rake hike skips Fedspeak.
Considering the fact that the US recession is likely to get delayed, most of the US data have thrown upside surprises, the debt ceiling issue is out of the way, immediate banking concerns have dissipated to some extent, and gold looks somewhat overextended at current rates.
Even if the US Federal Reserve refrains from a rate hike in June, the Central Bank is expected to hike the rate in July on uncomfortably high and sticky inflation. The odds of a rate hike in July have reached 88%.
The yellow metal is expected to trade in the $1920-$1990 range next week. Bears eye $1870; however, it will take a significant shift in investors’ expectations of the Federal Reserve’s near-term monetary policy, which in turn will require elevated inflation readings and a string of strong key data.
The US Federal Reserve will get to assess ISM non-manufacturing and CPI inflation data before taking monetary policy decisions at its June 13-14 meeting, though in all the possibility, the Central Bank will stand pat after raising rates ten times in as many meetings.
Gold has strong support at $1930 followed by $1920. Resistance is at $1965/$1975/$1990.
(The author is Associate VP, Fundamental Currencies and Commodities, Sharekhan by BNP Paribas)
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