COMEX gold rose during the first half of the week as recent data from the US, particularly the CPI and retail sales, showed that price pressures are cooling, warranting a smaller Fed action than previously expected.
Investors are now expecting the US Fed to hike rates by 25 bps in July and pushed back against any rate hikes in the September FOMC meeting.
Data released on Tuesday showed that US retail sales and industrial production missed estimates, a potentially welcome sign for the Fed as it seeks to cool inflation.
Retail sales in the US rose 0.2% m/m in June 2023, following an upwardly revised 0.5% increase in May, but below forecasts of a 0.5% rise, while industrial production went down 0.5% from a month earlier in June 2023, falling for the second month.
Weak economic data improved the conviction that Fed funds might be reaching peak rates sooner than expected.
However, gold prices pared early gains and edged lower during the second half of the week as the dollar gained. The greenback gained amid weakness in the index-heavy weights Euro, Pound and Yen.
The dollar index rose towards 100.8 levels, while the Euro slid after dovish comments from some ECB officials. ECB Governing Council member and known hawk Klaas Knot said monetary tightening beyond next week’s meeting is anything but guaranteed.The pound weakened as investors pushed back against a 50 bps hike in the next Bank of England meeting after the UK inflation print showed price pressures easing significantly.
The yen weakened towards $140 level as Bank of Japan Governor Kazuo Ueda reiterated his commitment to maintaining an ultra-loose monetary policy.
At the same time, US weekly jobless claims fell to a two-month low of 228k during the previous week, highlighting the resilience of the US Labor market, despite signs of slowing.
Central banks continue to accumulate gold in an environment of rising geopolitical tensions, slowing growth, and de-dollarization efforts. The PBoC announced the eighth consecutive rise in gold reserves in June (+21t).
Over the first half of the year, China’s gold reserves rose by 103t to 2,113t. According to the World Gold Council, seasonality and the elevated gold price are likely to continue to weigh on local Chinese wholesale gold demand in July and as a consequence might keep the local premium depressed.
September brings the traditional jewellery fair and the season for new product launches, which could intensify gold replenishment towards the end of Q3.
A slew of economic events is due next week. Monetary policy meetings of the Federal Reserve, European Central Bank, and Bank of Japan will take place on Wednesday, Thursday, and Friday respectively.
On the economic data front, flash PMIs from Western economies, US Q2 preliminary GDP, and Fed’s preferred PCE price index will be in the spotlight. Fed and ECB are expected to hike rates by 25 bps while BoJ might maintain the ultra-loose monetary policy.
Powell might sound hawkish in comments and telegraph the need for higher rate hikes amid a stronger-than-expected Labor market and core inflation still at two times more than Fed’s target.
Bullion might come under pressure in the coming week, however, any signs of dovishness from the Fed might boost the yellow metal.