Gold prices whipsawed amid hawkish central bank rhetoric

COMEX Gold prices moved between gains and losses during the central bank week and is poised to close relatively flat near $1,975 per troy ounce. The yellow metal declined during the first half of the week, as investors remained wary ahead of the June FOMC meeting.

Despite a 1% decline in the dollar index, gold prices have not risen, as US short-term treasury yields inched higher. Front-end rates rose after the CPI data and a hawkish FOMC meeting.

Dollar and treasury yields, which tend to follow similar path were decoupled as prospects of a nearing end to rate hikes and hawkish ECB weighed on the greenback while odds of higher rates in the near term aided yields.

US CPI data showed that the headline inflation declined to 4% in May 2023, the lowest since March 2021 and slightly below market expectations of 4.1%. Energy prices slumped while food inflation slowed.

Shelter inflation continues to be a major contributor to overall inflation numbers. However, the core CPI, which excludes volatile items such as food and energy, rose by 0.4% from a month earlier in May of 2023, as did in April and March, matching market estimates.

Gold prices further weakened post the FOMC meeting, as the Federal Reserve delivered a “hawkish skip”. The Fed left the target for the funds rate unchanged at 5% – 5.25%, but signaled rates may go higher if the economy and inflation do not slow down more.
The move marked the first pause in the tightening campaign following ten consecutive hikes that lifted borrowing costs to the highest level since September 2007. Policymakers said that holding the target range steady allows them to assess additional information and its implications for monetary policy, but noted they would be prepared to adjust it if risks emerge that could impede the attainment of their goals.

Out of forecasts from 18 Fed officials, the median estimate was that rates will need to rise to between 5.6% in 2023, suggesting two more quarter-point rate hikes. The GDP is seen rising 1% this year, higher than the 0.4% seen in March, while growth for both 2024 and 2025 was revised lower.

However, Gold prices staged a fantastic recovery on Thursday, rebounding from an intraday low of $1,936.1 per troy ounce and closing at $1,970.7 per troy ounce, as weak economic data and hawkish ECB policy outcome led to a sharp decline in the greenback. Other than the US Retail sales data, which rose 0.3% month on month in May, all the other economic indicators disappointed.

US weekly jobless claims came much higher than expectations, showing signs of a cooling Labour market, while industrial output, manufacturing output, and capacity utilization came in below estimates, indicating a slowdown in the Manufacturing sector.

Meanwhile, the European Central Bank raised the interest rates by another 25 bps during the June meeting, bringing the deposit facility rate to a 22-year high of 3.5%. And, during the press conference, ECB President Christine Lagarde stated that the ECB had more ground to cover and would likely continue raising rates in July, which proved to be a major blow to the greenback, boosting bullion.

Pausing the Fed funds rate along with projections for higher terminal rates gives the Fed flexibility to hike if data comes hot and at the same time cut the rates if data softens. At the same time, it makes dollar movement subject to the incoming economic data. After the FOMC meeting, interest rate futures pushed back expectations for rate cuts this year.

US Housing data, Flash Manufacturing PMIs, Powell’s testimony, and speeches from several Fed officials will be in focus for the coming week. Hawkish Fed rhetoric might weigh down on gold prices during the first half of the week, however, prices might rebound towards the second half if PMIs and unemployment claims show signs of economic weakness.

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

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