Spot gold at $2,334 was up nearly 1.29% on Friday at the time of the MCX closing. Gold rallied as the US bonds extended their ongoing rally despite hawkish Federal Reserve on soft inflation data and ongoing political turmoil in Europe. Investors are concerned that a political crisis is brewing in France in the wake of French President Macron’s call for a snap parliamentary vote after his party got trounced by the far-right Marine Le Pen’s National rally in the recently concluded European elections. The spread between French and German 10-year yields was set for its biggest weekly jump on fears of a possible debt crisis. Bond yield spreads of other nations like Italy were also widening, though the European Central Bank officials do not see any plausible reasons for alarm.
The US Dollar Index and yields
The ten-year US yields at 4.22% were down 0.48% at the time of the MCX closing and were down around 4.50% on a weekly basis. The US Dollar Index was seen at 105.55, up 0.29% for the day. It was up roughly 0.70% on the week.
Fedspeak
Cleveland Federal President Loretta Mester said on Friday that it is important not to wait too long to cut interest rates as the latest inflation data has been welcome news.
ETF holdings
Total known global gold ETF holdings stood at 81.02 Moz as of June 13, slightly lower than last week’s holdings level. Nonetheless, holdings grew in nine of the last ten days.
Data and event roundup
The University of Michigan consumer confidence data, released on Friday, came in at 65.60 in June, which is a seven-month low, as against the expectation of 72 as consumers got concerned about their financial wellbeing.Earlier in the week, the much-awaited US CPI data (May) fell short of expectations on every count; thus, boosting the possibility of multiple rate cuts. PPI inflation data trailed the forecast, too. Similarly, import price and export indices data, released on Friday, were also on the soft side, though both short- and long-term University of Michigan inflation expectations were slightly above the forecast. Notwithstanding the encouraging CPI inflation report, the Fed at its FOMC meeting concluded on June 12, was cautious in signaling a rate cut as its dot plot projects just one rate cut this year, sharply lower from three as projected in its March meeting. Thus, the Fed belied the markets’ hopes for multiple rate cuts this year, which is positive for the US Dollar Index.
The European Union’s lurching towards far-right ideology, as seen in the recent elections, is leading to geopolitical concerns, which is positive for the US Dollar Index and the US bonds.
Data next week
The major US data on tap next week include retail sales (advance-May), industrial production (May), weekly jobless and continuing claims, NAHB Housing Market Index (June), housing starts (May), S&P Global US manufacturing and services PMI (June preliminary), Leading Index (May) and existing home sales. Out of Europe, the focus will be on CPI, and manufacturing and services PMIs. China’s retail sales (May), industrial production (May), home prices (May) and both 5-year and 1-year loans will be on investors’ radar, too.
Outlook
Gold is expected to be volatile on crosscurrents of various factors at play presently. The US Federal Reserve is hawkish, but the US inflation data have been encouraging, raising the chances of rate cuts. It is to be noted that the Fed’s latest dot plot projects an additional rate cut next year. Traders will continue to monitor the political scenario and bond markets in Europe. Although the US yields are falling, the US Dollar Index is gaining on European political turmoil. The traders’ focus will be on Fedspeak, too. China not buying gold in May is a bearish development for the yellow metal. In such a scenario, gold may trade in a wide range of $2277 to $2365. Selling into rallies is preferable for short-term trading unless Fed Chair Powell changes his stance.
(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 The Economic Times)