Gold ends with weekly gains on dovish FOMC outcome

Gold continued to be highly volatile in the week gone as traders tried to front-run the possible Fed rate cuts amid quickly changing notions of the magnitude of rate cuts next year.

The US Federal Reserve unexpectedly turned dovish at its December 13 FOMC monetary policy meeting. Although the US Fed left the Fed Fund rate unchanged at 5.25%-5.50% as expected, the Central Bank projected three rate cuts in 2024 as Fed officials did not foresee rates being higher by the end of 2024 than their current levels.

The median projections suggested that the Central bank sees three 0.25 bps rate cuts next year amid weaker economic growth compared to the September projections. Fed officials saw inflation at 2.4% in 2024, returning to the 2% target in 2026. In his presser, the Fed Chair said that policymakers were thinking and talking about when it will be appropriate to cut rates. The median forecast for 2023 inflation came down to 3.20% from 3.70%.

The Federal Reserve officials continued to rely on financial and credit conditions to weigh on economic growth, though financial conditions have eased to the lowest level in almost two years. It was definitely a dovish FOMC outcome, which surprised the traders. Consequently, the US yields and the Dollar Index sank. The yellow metal, which had been under tremendous downside pressure following its stunning rally to a fresh all-time high of $2,135 on December 4, surged on dovish FOMC statements and forecasts. It surged around $80 within 24 hours of the FOMC decision.

Hawkish stances by the Bank of England and the ECB in their monetary policies announced the next day intensified the downside pressure on the US Dollar Index. The ECB and Bank of England kept their rates unchanged and more importantly, they did not drop their guards against inflation. The ECB President Ms. Lagarde said that they did not discuss rate cuts at their meeting.

The US Federal Reserve’s officials tried to push back against the markets’ expectations of sharp rate cuts next year Friday. Federal Reserve Bank of New York President John Williams, a voting member of the monetary policy committee, said it’s too early for officials to begin thinking about cutting rates as soon as March. He added that they were not really talking about rate cuts, and the financial markets reacted more strongly than what policymakers showed at the recently concluded FOMC meeting. Similarly, Atlanta Fed President Raphael Bostic, a voting member next year, said that he expects two rate cuts in 2024 but not starting until the third quarter.
Hawkish Fedspeak and better-than-expected S&P US global services and composite PMIs data sent the metal lower Friday. It closed with a loss of 0.77% at $2,019.79. Still, it managed to end the week with a gain of 0.80%. The ten-year US yields fell nearly 7% to 3.91% on the week, whereas the two-year yields at 4.44% were also down by approximately 7%. The US Dollar Index closed with a weekly loss of around 1.50% at 102.59, though it was up by 0.63% on Friday.Total known global gold ETF holdings in the first four days of the week were down by around 0.28 million Troy ounces from previous week’s closing level.

The major US data next week include housing starts (November), existing home sales (November), Conference Board Consumer Confidence (December), Q3 GDP final reading, Philadelphia Fed business outlook (December), PCE deflator inflation (November), Durable goods orders (November preliminary), and University of Michigan consumer sentiment and inflation expectations.

Out of Europe, focus will be on Germany’s IFO business climate (December), Euro-zone’s CPI inflation (November final), consumer confidence (December preliminary); and the UK’s CPI inflation (November), retail sales (November), and Q3 final GDP.

Major event of next week will be the Bank of Japan’s monetary policy decision due on December 19.

China’s Central Bank will decide on its 5-year and one-year Loan Prime rates, though no change is expected per se.

Hawkish Fedspeak and better-than-expected US retail sales, weekly jobless claims, and services and composite PMIs have negated the impact of a dovish FOMC outcome to some extent, which means that the moves will largely become data dependent, though upward moves on weak US data will be more pronounced than the downward moves on strong data. Thin liquidity as the year draws to an end may exaggerate the moves.

Gold is expected to range trade next week, though it may start the week on a weak footing.

Support is at $2010/$2000/$1960. Resistance is at $2052/$2075.

(The author isAssociate Vice President, Fundamental Currencies and Commodities, Sharekhan by BNP Paribas)

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