Gold prices rose on signs of a June pause; 25 bps hike likely in July FOMC meeting

The yellow metal started the holiday-shortened week on a positive note and is poised for the best weekly gain since April, amid sharp fall in the greenback and the US benchmark treasury yields.

The dollar index fell below 103.5 levels, after touching a two-month high of 104.7 on Wednesday, while the yield on the US 10-year notes declined by almost 20 basis points towards 3.6%.

The move came as investors gauged recent US economic data, mixed comments from Fed officials, and the debt ceiling deal.

After weeks of negotiations, the Senate and the House approved the bill to suspend the US debt ceiling until 1st January 2025 along with government spending cuts for two years. Markets have cheered the move, with a rally in equities.

However, there are also concerns whether the deal will raise the odds of a recession by limiting government spending to support US growth, which is providing some cushion to gold prices. Even though markets are prepared for the worst scenario, a deal was widely expected before the “X Day.”

Economic data released during the previous week showed an uptick in consumer spending and PCE inflation, along with an upward revision in US GDP numbers, raising the odds of another quarter-point rate hike in June and with the market pricing in a complete 25 bps hike for the July FOMC meeting.
However, recent data showed that unit labour costs in the US rose less than expected in Q1 and the slump in productivity was revised lower, against Fed’s argument that the tight Labour market was adding to price pressures.Meanwhile, ISM Manufacturing PMI in the US fell to 46.9 in May, from 47.1 in April, contracting for a seventh month. Hawkish comments from ECB officials further weighed on the greenback, boosting bullions.

Federal Reserve officials signaled that they plan to keep rates steady in June while keeping the option for further hikes in the futures if inflation sees no signs of cooling. Comments were mostly mixed.

Federal Reserve Governor Philip Jefferson signaled the central bank is inclined to keep interest rates steady at its next meeting in June to give policymakers more time to assess the economic outlook, but such a decision wouldn’t mean hikes are finished.

Federal Reserve Bank of Philadelphia President Patrick Harker said the US central bank is close to the point where it can stop raising interest rates and turn to holding them steady in an effort to further bring down inflation.

Among the hawks were Cleveland Fed President Loretta Mester, who said that there was no “compelling” reason to wait before implementing another interest rate rise should economic data confirm that more must be done to bring US inflation under control.

CME FedWatch tool is now showing a 75% probability for a June pause.

US Non-farm payrolls data is going to be crucial. Any upside surprise in non-farm payrolls might prove to be short-term headwind for gold prices. There are no major events scheduled for the coming week, other than US Services PMI.

However, markets might remain volatile ahead of the US CPI data and FOMC meeting due on June 13th and 14th respectively.

Amid expectations of ease in US headline inflation numbers coupled with prospects of a Fed pause in June meeting, we might see gold prices staying buoyed for the coming week.

On the price front spot gold took good support near $1934/oz(swing support and resistance turned support). Price has bounced back and is getting ready for the resumption of the primary up trend with a bullish engulfing candle.

However, this week’s closing is important and next week’s move might confirm the setup.

(The author is VP-Head Commodity Research, Kotak Securities Ltd)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)