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Inflation data and safe-haven buying lift Treasuries, gold up

by xyonent
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Spot gold rose about 1.29% to $2,334 on Friday at the close of MCX trading. Gold gained as U.S. Treasuries continued to rise despite a hawkish U.S. Federal Reserve taking a tough stance in the wake of weak inflation data and continuing political turmoil in Europe. Investors are worried about a brewing political crisis in France after President Emmanuel Macron called for an early parliamentary vote following his recent defeat in the European Parliament elections to the far-right Marine Le Pen’s National Party. The gap between French and German 10-year government bond yields rose to its biggest weekly increase on fears of a possible debt crisis. The gap between government bond yields in other countries, such as Italy, has also widened, but European Central Bank (ECB) officials see no compelling reason for alarm.

US Dollar Index and Yields

The 10-year US Treasury yield was at 4.22%, down 0.48% at the close of trading on MCX and down around 4.50% on a weekly basis. The US Dollar Index was at 105.55, up 0.29% on the day and up around 0.70% on a weekly basis.

Federal Language

Cleveland Federal Reserve Bank President Loretta Mester said Friday that it’s important not to wait too long to cut interest rates because the latest inflation numbers are welcome news.

ETF Holdings

As of June 13, global gold ETF holdings totaled 81.02 million ounces, down slightly from last week’s holdings, although holdings have increased in nine of the past ten days.

Summary of data and events

The University of Michigan Consumer Sentiment Index, released on Friday, came in at 65.60 in June, below expectations of 72 and the lowest in seven months, as consumers became nervous about the state of the economy. Earlier this week, the much-anticipated U.S. CPI data (May) came in below expectations on all counts, raising the possibility of multiple rate cuts. PPI inflation data also came in below expectations. Similarly, import price and export index data released on Friday were also weak, while the University of Michigan’s short-term and long-term inflation expectations were both slightly above expectations. Despite the positive CPI inflation report, the Fed was cautious in signaling a rate cut at its FOMC meeting that ended on June 12, as the dot plot predicted only one rate cut this year, a significant decrease from the three predicted at the March meeting. Thus, the Fed disappointed market expectations of multiple rate cuts this year, which is positive for the U.S. Dollar Index.

The European Union’s shift towards far-right ideology, as seen in recent elections, is raising geopolitical concerns, which is positive for the US Dollar Index and U.S. Treasuries.

Next week’s data

Key US data due next week include May retail sales (flash), May industrial production, weekly and continuing jobless claims, June NAHB housing market index, May housing starts, June flash S&P Global US manufacturing and services PMI, May leading index and existing home sales. Outside Europe, CPI, manufacturing and services PMI will be in focus. China retail sales (May), May industrial production, May home prices, 5-year and 1-year mortgages will also be of interest to investors.

Outlook

Gold is currently expected to be volatile due to a combination of factors. The US Federal Reserve is hawkish, but the US inflation data is positive, raising the possibility of a rate cut. It is worth noting that the Fed’s latest dot plot predicts another rate cut next year. Traders will continue to keep a close eye on the European political situation and the bond market. US yields are declining, but the US Dollar Index is rising on European political turmoil. Traders’ attention will also be on the Fed’s comments. China’s lack of gold purchases in May is a bearish development for gold. In such a scenario, gold could trade in a wide range of $2277 to $2365. Unless Fed Chairman Powell changes his stance, selling on the upside is favorable for short-term trading.

(The author is Vice President, Fundamental Currencies & Commodities, Sharekhan, BNP Paribas)

(Disclaimer: The recommendations, suggestions, views and opinions expressed by the experts are their own. They do not necessarily represent the views of The Economic Times)

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