Gold weakness likely to persist; Support seen at $1930/$1900

Spot gold closed with a weekly loss of 1.60% at $1945.74. The 10-year US yields at 3.79%, while the US Dollar Index recorded a weekly gain of around 1% to rise to 104.23.

Friday’s US data releases were mostly positive for the US Dollar and negative for bonds, thus for gold. Headline durable goods orders (April preliminary) rose 1.10% vs the forecast of a 1% decline as March data was revised higher.

Real personal spending (April) was noted at 0.50%, which was better than the expected reading of 0.30%; the PCE Core deflator rose 0.40% on the month, thus beating the estimate of 0.30%.

PCE Core deflator YoY at 4.70% came in above the forecast of 4.60%; University of Michigan sentiment (May final) rose to 59.20 from the previous reading of 57.70; the University of Michigan 5-10-year inflation matched the forecast of 3.10%.

On the flip side, Durables ex-transportation came in at -0.20%, thus falling short of expectations of a decline of 0.10%, while the University of Michigan one-year consumer inflation expectations data at 4.20% was below the forecast of 4.50%.

April Advance goods trade balance -$96.80 billion was lower than the forecast of -$85.90 billion, which is negative for the US Dollar; however, investors are presently more concerned with inflation and consumers’ spending power.

Healthy real personal spending spells further weakness in bonds and gold.The US Federal Reserve’s Ms. Mester considers the PCE deflator data too high and said that everything is on the table for the June meeting.

Macroeconomic data released earlier in the week were mostly better than forecast: S&P preliminary Global US services PMI data for May stood at 55.10 vs the estimate of 52.50.

S&P Global US composite PMI data was noted at 54.50 Vs the forecast of 53; though manufacturing activity slipped back into contraction.

Services PMI data recorded its highest reading in thirteen months. The second estimate of Q1 GDP at annualized 1.30% beat the forecast of 1.10%.

Weekly jobless claims at 229k were lower than the forecast of 245k.

The FOMC minutes for the May 2-3 meeting showed that the Committee members were split on the next rate hike decision, but they didn’t see any rate cuts this year as they remain concerned about sticky and elevated inflation.

The members forecast a mild US recession later this year to be followed by a moderate recovery.

As both MoM and YoY PCE core deflator readings turned out to be higher than both the expected and the previous readings, the US Fed swaps now price at around 60% of a rate hike at the upcoming June 14 FOMC meet.

Just a few weeks back markets were looking not only for a pause in the Federal Reserve’s rate hike spree but drastic rate cuts towards the end of the year, too.

Policymakers in the US were reported to be inching closer toward a debt ceiling deal as differences narrowed down. A debt deal is possible on the weekend.

Risk appetite remains strong on IT stocks frenzy, which is yet another negative factor for the metal. As both the treasury yields and Dollar are expected to rise on recalibration of rate path movements, gold is likely to remain under pressure.

Except for the debt deal dragging on perilously close to X date of June 6-9, the metal doesn’t have much support.

Next week’s focus will be on the US JOLTS job openings (April), US ISM manufacturing (May), and most importantly the nonfarm payroll report for May.

Support is seen at $1930/$1900. Resistance is at $1965/$1988.

(The author is Associate VP, Fundamental Currencies and Commodities, Sharekhan by BNP Paribas)

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