Gold outlook remains weak for the coming week; resistance seen at $1950-1980 region

Spot gold closed the week with a loss of 1.90% at $1921.47. The highlight of the week was the UK’s core CPI inflation rising to a 31-year high, which stoked concerns among investors as elevated inflation calls for further aggressive rate hikes by the Bank of England amid slowing growth.

Bank of England (BoE) hiked the key rate by 50 bps to 5%, which defied market expectations of a 25 bps hike. There is a 30% possibility of the BoE raising

rates to 6.25% to control inflationary pressure.

Friday was the day of PMI data. PMI data out of the Eurozone turned out to be disconcerting as Germany’s preliminary manufacturing PMI for June came in at 41 Vs the forecast of 43.50, while services PMI stood at 54.10 vs the forecast of 56.30.

Eurozone’s manufacturing PMI was noted at 43.60, which fell short of expectations of remaining unchanged at 44.80, while services PMI at 52.40 was well below the forecast of 54.50 and the prior reading of 55.10. It is the lowest reading in the last four months.

The Eurozone’s manufacturing PMI fell to the lowest in the last three years as high borrowing costs severely impacted the economy. UK’s PMI data were a tad better than Euro-zone data; however, data fell short of the forecast as the manufacturing PMI data fell to an eight-month low.

S&P Global US manufacturing PMI data for June recorded at 46.20 was the lowest reading in the last eight months.
Federal Reserve Chair Powell called for more rate hikes in his semiannual testimony to the US Housing Financial Services Committee and the Senate Banking Committee as inflation remained elevated.
He added that the FOMC members don’t expect a rate cut this year. His testimony weighed on commodities as yields soared.

However, the US yields, which rose on hawkish Federal Reserve speakers, retreated a bit Friday on lackluster PMI data out of Europe and the UK as investors sought safety in bonds on recession fears, which helped the yellow metal recover from its cyclical low of $1910 hit on the last trading day of the week.

The US Dollar Index gained on the hawkish stance of some Federal Reserve speakers and US PMI data being somewhat better than its European counterparts.

The US Dollar Index closed the week ending June 23 with a gain of around 0.60% at 102.87. Two-year yields at 4.72% were up by nearly 0.80% on the week, while ten-year yields at 3.73% were down nearly 0.90%.

Next week, investors’ focus will be mainly on CPI inflation data out of the Euro-zone (June), UK’s GDP data (1Q F), and the US real personal spending (May), GDP (1Q T), and PCE core deflator (May) data.

Gold is under pressure despite global slowdown concerns as the key central banks continue with their agenda of controlling inflation through more rate hikes.

It will take a clear deterioration in the major economies or a marked slowdown in inflation before key central banks change their hawkish stance.

Thus, the outlook of the yellow metal remains weak in the near term, though yields could be the key driver in the very short term.

Gold bears have set their eyes on $1870. Major interim support is at the psychologically important round figure of $1900, while resistance is at $1950, followed by the $1975-1980 region.

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

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