Gold closed with strong gains of 2.50% on the week as the markets took solace in their notion that the US Federal Reserve may pause rate hikes in next few months and the next hike would be 25 bps, not 50 bps. The US 10-year yields were up 0.30% on the week, while the US Dollar Index retreated nearly 0.50%.
The US Conference Board Consumer Confidence data for February came in at 102.90 as .against the forecast of 108.50, while the January reading stood at 107.10. The data is positive for the yellow metal. Similarly, S&P CoreLogic CS slid 0.50% in December as house prices slowed for the eighth straight month. US Durable goods orders for January sank 4.50% month-on-month, which was worse than the forecast of a 4% decline. However, ex-transport durables goods orders up 0.70% month-on-month rose more than the forecast of 0.10%. Inflation readings continue to remain a concern as Unit labour costs for 4Q climbed by 3.20% as against the forecast of 1.60%. ISM manufacturing prices crept back into expansion zone in February as the reading stood at 51.30 as against the forecast of 46.50. US 10-year yields climbed to the highest level since November 2022, thus stoking rate concerns.
However, Atlanta’s Federal Reserve President Mr Bostic’s comments that the Central Bank may possibly pause rate hikes sometimes this summer and he prefers a 25 bps hike at the next FOMC meeting led to speculative rally in risk assets as traders focused on the ‘pause’ word. It led to decline in yields, which triggered a massive rally in the risk assets, thus pressurising the US Dollar Index. China’s manufacturing and services PMIs beating the forecast and rising back into expansion zone also boosted the risk sentiments, which weighed on the US Dollar Index.
The US ISM non-manufacturing data for February beat the forecast as the data stood at 55.10, thus beating the forecast of 54.50. The data showed that January’s reading of 55.20 was not a fluke. In addition, data from services companies show that price pressures remain broad and elevated as 84.90% of the services providers said that prices paid were same or higher in February.
Looking at the inflation readings, sound ISM non-manufacturing data and weekly jobless claims, gold rally is all about risk-on sentiments which are primarily the result of market participants’ notion of a pause in rate hike.
Yields are expected to go much higher as the US job market is quite strong, services sector is robust, and inflation has started to rise once again. Next week traders will focus on the US monthly job report.
The rally in gold is likely to fade sooner than later. Support is at $1828/$1800, while resistance is at $1862/$1875.(The author is AVP, Fundamental currencies and Commodities analyst at Sharekhan by BNP Paribas)