Spot gold closed with a loss of $1 at $1959.20 in an eventful week.
Gold got some boost from the peak rate narrative as both the European Central Bank and the US Federal Reserve made it clear that they would adopt a data-dependent approach in deciding their monetary policies going forward. However, the much anticipated Federal Reserve pause is still elusive.
Global manufacturing and services PMIs data in the week were mostly disappointing. Composite PMI data of the Euro-zone, Germany, the UK, and the US lagged the forecast and edged lower from their respective prior readings. Germany’s IFO business climate data for May at 87.30 fell short of the forecast of 88 and was lower than the previous reading of 88.60.
Most of the US data threw upside surprises with Philadelphia Fed non-manufacturing (June), FHFA House Price Index (May), Conference Board Consumer Confidence, advance estimate of Q2 GDP, personal consumption (Q2 A), durable goods orders (June), jobless claims and pending home sales (June) topped the forecast.
US 2Q A annualized GDP reflected resilient consumer spending and strong business investment as the US economy recorded a growth of 2.40% QoQ that beat the forecast of 1.80%.
The IMF upgraded its global growth forecast for 2023 to 3% from its previous forecast of 2.80% made in April as it sees the US economy growing 1.80% this year as compared to the April forecast of 1.60%.
As expected, the US Federal Reserve hiked the Fed fund rate by 25 bps to the 5.25%-5.50% range and kept its options going forward open. The Fed Chair Powell observed that inflation has proved to be more resilient than expected amid a strong job market as labor demand still substantially exceeds supply.The European Central Bank (ECB) hiked the interest rate by 25 bps, thus bringing the deposit rate to 3.75%; however, ECB’s President Ms Lagarde acknowledged that the European economic situation was deteriorating and the Bank will be data dependent for its future course of monetary policy.
Bank of Japan took the market by surprise by unexpectedly tweaking its yield control curve (YCC) policy. The Central Bank said that it will buy ten-year Japanese Giver bonds (JGBs) at 1%, thus effectively raising the cap from 0.50% to 1%.
This unforeseen twist lays a background for further normalization of the Japanese bond market in the future, which has somewhat negative repercussions for bonds in general, thus is bearish for gold in turn.
Friday’s US data showed that inflation continued to cool as consumer spending increased. The personal consumption expenditures price index rose 0.2% in June from May. PCE deflator y-o-y increased 3%, which is the slowest pace in more than two years.
The core PCE price index rose 0.2% in June on m-o-m basis and was up 4.1% from June 2022. At the same time, consumer spending, adjusted for inflation, increased 0.4% in June — the most since January, while May data was revised higher from 0% to 0.10%.
The US Dollar Index edged lower Friday as the US yields softened, which helped gold prices close higher on the last trading day of the week ending July 28.
US ten-year yields closed the week with a gain of around 3% to close at 3.957%, while two-year yields were at 4.885%, which was up around 1%. The US Dollar Index was around 0.60% up on the week as it closed at 101.71.
Next week investors’ focus will be on the JOLTs job openings, ISM manufacturing, ISM services Index, and US nonfarm payroll report (July).
On the Euro-zone data front, GDP (2Q A), CPI (July), employment (June), manufacturing, and services PMIs data will be closely watched. Bank of England’s monetary policy decision is due on August 3.
Fundamentals of the yellow metal are not so particularly appealing as the Fed pause is yet to materialize, Euro may find it hard to advance meaningfully against the US Dollar from current levels, the US economy is doing well, risk appetite is healthy, the safe haven flows are absent, and total known gold ETF holdings continue to decline.
The ETF holdings fell for five consecutive days through July 27, which has taken the holdings level to the lowest level since April 2020. Real US yields are rising Gold trading in the present context has become all about forex and bond moves.
Support is seen at $1950/$1935/$1900. Resistance is at $1965/$1987.
(The author is Associate VP, Fundamental Currencies and Commodities, Sharekhan by BNP Paribas)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)