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Gold: Hawkish Fed, other bearish factors weigh on gold

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Spot gold, which had been weak, recovered on Thursday and Friday ahead of the release of important U.S. PCE inflation data on Friday. Spot gold recovered nearly 2% from a weekly low of $2,293 to rise to $2,339. However, gold gave up some of its gains as the much-anticipated U.S. PCE inflation data (May) came in as expected. Gold closed down $1 on Friday at $2,326, but was up nearly 0.30% for the week.

Friday’s presidential debate saw Trump gain an advantage over Biden, which led to further gains for the US Dollar Index, but healthy risk appetite erased some of the gains. The index closed down 0.04% on Friday at 105.84, but was up about 0.04% for the week. The 10-year US Treasury yield was at 4.38%, up 2.28% from the previous day and up about 4% for the week. The 2-year US Treasury yield was up 0.20% for the week, closing at about 4.75%.

Federal LanguageFed officials remain cautiously hawkish, signaling they are in no rush to cut interest rates and essentially wanting more evidence that inflation is heading toward the central bank’s 2 percent target.

Summary of data

US Q1 GDP data (annualized Q1 growth) was in line with expectations at 1.4%, beating initial expectations of 1.30%, while personal consumption was revised down to 2% from initial 1.50%. PCE deflator inflation data (May) released on Friday was in line with expectations, but the data showed the Fed’s preferred inflation measure had eased since May. Personal income beat expectations, but spending was weak. University of Michigan and central bank confidence beat their respective expectations as inflation expectations eased. Weekly employment and Chicago PMI data beat expectations.

CPI inflation data from Australia, Japan and Canada came out this week stronger than expected, posing a risk to the disinflation theme.Next Week’s Data and EventsTraders are looking forward to the French elections, UK elections, JOLT Jobs, ISM Manufacturing, ISM Services and Nonfarm Payroll reports.OutlookBased on regional Fed surveys and Conference Board confidence data, upcoming nonfarm payroll reports are expected to reflect a robust job market. US ISM PMI is expected to be robust as S&P Global US PMI data is robust. The French election results are likely to confirm the rise of far-right political ideology, which will be positive for the US Dollar, but the potential for lower US yields will mitigate the impact to some extent. Fed Chairman Powell’s speech will be important as the Fed’s rhetoric remains hawkish. Inflation is taking hold in developed countries. In this scenario, gold is expected to fall unless Chairman Powell unexpectedly turns dovish again. Selling on the upside is favored in the short term. Support at $2300/$2277. Resistance at $2350/$2370/$2385.

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

(DisclaimerRecommendations, suggestions, views and opinions expressed by experts are their own and do not necessarily represent the views of The Economic Times.

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