Gold may decline as Friday’s US bonds relief rally likely to be tested

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Spot gold closed with a weekly gain of 0.10% at $1,925 and was up 0.31% on Friday.

The week ending September 22 was marked with crucial monetary policy decisions of three key central banks – Federal Reserve, Bank of England and Bank of Japan.

The US Federal Reserve, in a widely expected move, skipped a rate hike at its FOMC monetary policy meeting concluded on September 20. However, the Federal Reserve’s stance was hawkish as the Central Bank increased the projected rate for 2024 to 5.10% from 4.60%, which implies a rate cut of 50 bps as against the previous estimate of a 100 bps rate cut. The Federal Reserve raised the growth forecast for 2023 to 2.10% from the previous projection of 2%. The bank sees a lower unemployment rate, too. In his press conference, Federal Reserve Chair Powell said that the economy has strong momentum, though high energy prices if sustained, can affect inflation. The US Federal Reserve hinted that the bank is more likely than not to hike the benchmark rate once more.

Hawkish Federal Reserve sent the US ten-year yields soaring as the ten-year US yields took out the strong resistance at 4.35% to touch 4.50%.

UK’s inflation data trailed the forecast, which prompted the Bank of England to unexpectedly skip a rate hike as the bank shifted its focus from its inflation fight to the risks to the UK economy.

Bank of Japan kept its key rate and YCC policy unchanged, thus belying the hopes of any changes. The Japanese Yen continues to be under pressure.
Friday was the day of global manufacturing, services, and composite PMIs. S&P Global US composite PMI data (September Preliminary) at 50.10 trailed the forecast as services PMI data at 50.20 was short of expectations of 50.70. The data helped the US ten-year yields ease by 1.25% to 4.438%. Euro-zone’s composite PMI data (September P) was noted at 47.10 Vs the forecast of 46.50. UK’s composite PMI data (September Preliminary) came in at 46.80 Vs the estimate of 48.70 as services PMI data print at 47.20 Vs the forecast of 49.40 was a huge disappointment.Russia added gold to its reserves in August, thus taking the gold level in its reserves back to the 2023 high.

China has lifted gold import curbs as Renminibi has recovered, thus gold premium in China has cooled down from a record high of $121 seen a few days ago.

Total known global gold ETF holdings fell for the sixteenth straight day through September 21. The data shows that investing demand remains poor, thus central banks buying gold is one of the major supports for the metal. Another major supportive factor for gold is concerns about the global economy as European economies are staring at stagflation, and China’s economy is yet to gather pace.

Next week, investors will focus primarily on the US durable goods orders ( August Preliminary), new home sales (August), 2Q GDP, and PCE core deflator inflation (August). Out of Europe, the focus will be on Germany’s IFO business climate, CPI inflation and job data; the Euro-zone’s; and the UK’s Q2 (final) GDP.

US ten-year yields were up nearly 2.50% on a weekly basis, whereas two-year yields hardened by around 2%. The Dollar Index gained 0.20% on the week.

US bonds can come under pressure next week as some $134 billion front-end loaded treasury coupon supply is lined up next week. Yields edging higher will put the metal under pressure.

Support is at $1,915/$1,900. Resistance is at $1,932/$1,950.

(The author is Associate Vice President, Fundamental Currencies and Commodities, Sharekhan by BNP Paribas.)

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