Gold rally on weaker dollar may not last long; resistance seen at Rs 60100-60600

Banking industry concerns continue to recede, though the risk of banks’ deposit outflows to money market funds may affect the lending process of the banks, which means that eventually, there is a distinct possibility of economic slowdown in the coming months.

In absence of any major negative headlines concerning the banking sector, risk appetite has remarkably improved, which is evident in the easing of financial stress.

Market participants largely see the Federal Reserve approaching the end of its tightening cycle.

This perception about the possible monetary path is keeping the yields suppressed, which in turn is also fueling the risk-on sentiments, thus wider markets have been trending higher.

The Federal Reserve’s preferred gauge of inflation showed improvement on the inflation front. Both core PCE m-o-m and y-o-y trailed the forecast.

Core PCE inflation for February rose 0.3% Vs the estimate of 0.4% as January’s data was revised lower to 0.5% from 0.6%. Core PCE inflation data on a y-o-y basis came in at 4.6% as against the estimate of 4.7%.

Although Core PCE readings were encouraging, the services component of inflation contributed the lion’s share to the increase in these readings.The final reading of the University of Michigan one-year inflation expectations for March at 3.6% fell short of expectations of 3.8%. Risk assets cheered crucial inflation data trailing the forecasts.

Gold failed to rally on weaker-than-expected inflation as improving risk appetite sapped some of its safe-haven appeals. That the end of the month and quarter flows pushed Dollar higher despite soft data weighing further on the yellow metal.

The US President has called for strengthening the supervision of the banking system. The administration wants the regulators to take necessary steps to safeguard the banks with assets between $100 billion and $250 billion.

Proposed reforms lay stress at raising liquidity and increasing the frequency of stress tests for mid-sized banks.

Spot gold closed with a weekly loss of nearly 0.40% at $1969.69. The US Dollar Index at 102.59 was down 0.40% on the week as the ten-year yields at 3.47% were up around 3% on a weekly closing basis.

Next week will be crucial for the metal as we have US manufacturing, US non-manufacturing, and monthly Non-farm payroll report on the cards.

In absence of any negative headlines concerning banking, gold will rely upon the US yields and the Dollar Index movements. Consensus on Dollar is bearish as the markets expect the Federal Reserve to pause after at the most one rate hike, while European Central Bank continues with its hawkish stance rhetoric aiming to rein in inflation.

Gold rally on a weaker Dollar may not last long as in the present situation risk assets may dent the safe-haven demand for the metal.

Thus, gold may eventually grind lower towards its key support at $1930 (MCX June gold at Rs 58500). Interim support is around $1958 (MCX June gold at Rs 59300). Resistance is seen at $1990/$2010 (MCX June gold at Rs 60100/Rs 60600).

(The author, Praveen Singh is AVP, Fundamental currencies and Commodities analyst at Sharekhan by BNP Paribas)