Gold rises as US bonds rise on inflation data and safe haven

Spot gold was up nearly 1.29% at $2,334 on Friday at MCX close. Gold gained on the back of an ongoing rally in US bonds despite soft inflation data and the Federal Reserve’s accommodative stance on the ongoing political turmoil in Europe. Investors are worried that a political crisis is brewing in France, as French President Macron called for a quick vote for a parliamentary election after his party was defeated by far-right Marine Le Pen’s National Rally in the recently concluded European elections. The gap between French and German 10-year yields was set for the biggest weekly jump due to fears of a potential debt crisis. Bond yield spreads of other countries such as Italy were also widening, although European Central Bank officials see no reasonable cause for concern.

US Dollar Index and Yields

The ten-year US yield was down 0.48% at 4.22% at the time of MCX close and was down around 4.50% on a weekly basis. The US Dollar Index was seen up 0.29% for the day at 105.55. It was up around 0.70% on the week.

Fedspeak

Cleveland Fed President Loretta Mester said Friday that there shouldn’t be too long to cut interest rates, as the latest inflation data is welcome news.

ETF Holdings

Total known global gold ETF holdings stood at 81.02 moz as of June 13, slightly lower than the previous week’s holdings level. Still, holdings increased in nine of the last ten days.

Data and event roundup

University of Michigan consumer confidence data released Friday came in at 65.60 in June, a seven-month low, while it was expected to reach 72 as consumers remained concerned about their financial well-being.

Earlier in the week, the much-awaited US CPI data (May) came in below expectations on every count; thus, fuelling the possibility of multiple rate cuts. The PPI inflation data also lagged forecasts. Similarly, the import price and export index data released on Friday were also on the soft side, although the University of Michigan’s short-term and long-term inflation expectations were slightly higher than forecasts.

Despite the encouraging CPI inflation report, the Fed was cautious in signalling a rate cut at its FOMC meeting concluded on June 12, as its dot plot forecasts only one rate cut this year, much lower than the three projected at the March meeting. Thus, the Fed defied market expectations of multiple rate cuts this year, which is positive for the US dollar index.

The EU’s tilt towards far-right ideology, as seen in recent elections, is raising geopolitical concerns, which is positive for the US dollar index and US bonds.

data next week

Key US data coming next week include retail sales (advance in May), industrial production (May), weekly unemployment and continuing claims, NAHB Housing Market Index (June), housing construction starts (May), S&P Global US Manufacturing and Service PMI (June preliminary), Leading Index (May) and existing home sales. Out of Europe, the focus will be on the CPI and manufacturing and service PMI. China’s retail sales (May), industrial production (May), home prices (May) and both 5-year and 1-year debt will be on investors’ radar.

Outlook

Gold is likely to fluctuate due to various factors currently at play. The U.S. Federal Reserve is hawkish, but U.S. inflation data has been encouraging, increasing the chances of rate cuts. It is worth noting that the Fed’s latest dot plot forecasts additional rate cuts next year. Traders will continue to keep an eye on the political scenario and bond markets in Europe. Although U.S. yields are falling, the U.S. dollar index is gaining momentum due to European political turmoil. Traders will also be watching the Fedspeak. China not buying gold in May is a bearish signal for the yellow metal. In such a scenario, gold may trade in a broad range of $2277 to $2365. Until Fed Chair Powell changes his stance, it is better to sell in the uptrend for short-term trading.

(The author is Associate Vice President, Fundamental Currencies & Commodities, Sharekhan by BNP Paribas)

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