Gold traders wind down their activities ahead of Christmas and New Year

One of the key themes that seem to be supporting gold presently is the increased possibility of a recession in the US next year. The Federal Reserve sees the economy barely growing amid elevated inflation as the unemployment rate may rise to 4.60% from the present rate of 3.70%.

A similar scenario may unfold in the UK and euro-zone as their respective central banks ratchet up interest rates despite increasing risks to fragile growth.

Spot gold closed with a minor weekly loss of nearly 0.15% at $1793.30 despite hawkish hikes by the US Federal Reserve and the European Central Bank.

The US Dollar Index closed almost unchanged on the week at 104.84. Gold benefitted on sluggish US yields as notwithstanding hawkish 50-bps hike each by the US Federal Reserve and the European Central Bank the ten-year US yields dipped 2.78% on the week to end at 3.488%.

The US Federal Reserve acknowledged that the inflation trend has been down in the last few months; however, the Bank asserted that the said trend doesn’t mean much as headline inflation at 7.1% (November), though lower than the 7.3% forecast and the previous figure of 7.7% (October), is still way above the desired target of just above 2%.

The US Federal Reserve virtually negated any possibilities of easing its rate hike stance in near-term by projecting the terminal rate to be at 5.1% (in the 5.00-5.25% bracket) vs the 4.6% (the 4.50-4.75% bracket) it projected in September.

The European Central Bank, as expected, hiked the benchmark bank deposit rate by 50 bps to 2%, and was unequivocally hawkish in its forecasts that the Bank is likely to do multiple 50 bps hikes as it prepares markets to price 4% terminal rates.

In addition, the ECB will begin quantitative tightening in February 2023.

The US yields fell on disappointing US retail sales, Philadelphia manufacturing, industrial production and S&P global US manufacturing, services, and composite data released in the week ending December 16.

Investors will look forward to key economic releases like US GDP, housing, and the Fed’s preferred gauge of inflation PCE price Index due next week.

Next week, gold may test resistance at $1810/$1825 should the US data fail to throw a major upside surprise.

However, investors should be cautious about the volatility possibility emanating from low liquidity as traders wind down their activities ahead of Christmas and New Year.

Support is seen in the $1750-$1765 zone.

(The author is AVP, Fundamental currencies, and Commodities analyst at Sharekhan by )

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