The US Dollar Index rallied for the eighth consecutive week, which is its longest winning streak since 2005. The Greenback gained as the US economy is presently doing better than its peers, especially the European economies. The Euro-zone and the UK economies are grappling with a grim possibility of stagflation as these economies are slowing down amid high inflation, thus the Bank of England and the European Central Bank face a tough task of bringing inflation down without high interest rates causing further damage to these economies. US ISM manufacturing (August), ISM manufacturing prices paid, initial jobless claims, ISM services and ISM services data were better than forecasts and showed improvement over their respective previous readings.
On the other hand, the Euro-zone’s 2Q GDP (final) reading was revised lower to 0.10% from the previous estimate of 0.30%; even the y-o-y reading at 0.50% trailed the estimate of 0.60%. Similarly, Japan’s 2Q (final) GDP was revised lower from 1.50% to 1.30% Vs the forecast of 1.20%.
High oil prices and the ailing Chinese economy are other major factors supporting the US Dollar Index in the present scenario. In a notable development, the Chinese Yuan has fallen to an all-time low against the US Dollar.
Spot gold closed the week ending September 8 with a weekly loss of 1% as it closed at $1919. The two-year US yields at 4.989% were up around 1.30% as the tens were up roughly 1.90% to close at 4.26%.
The US Federal Reserve officials seem to be leaning towards a skip in September, though they are open to a hike later this year, thus November rate hike probability stands above 50% currently.
John Williams, president of the New York Federal Reserve, said that the Fed’s monetary policy is in a good place, though it needs to be data-dependent. Fed’s Bostic stressed at letting the restrictive policy work, whereas Goolsbee informed that the Fed’s debate was shifting to how long to keep rates high. Analysis by two Chicago Fed economists suggests that the Fed’s policy is already restrictive enough to bring down the US inflation to the Federal Reserve’s target of 2% by mid-2024 without causing a recession. The Boston Fed President Susan Collins said that further tightening may be warranted depending upon the incoming data. Christopher Waller, the Fed’s Governor, is leaning towards a skip in September as the data suggest that they need not do anything soon. Cleveland Fed President Mester called for further tightening to curb inflation.In a positive development for gold, Central Banks bought a net 55 tons of gold in July with China emerging as the largest buyer adding 23 tons of gold to its reserves, thus extending its buying spree to the ninth consecutive month. China has bought a net 188 tons of gold YTD and is the largest gold buyer this year so far.
Next week, investors will closely watch US CPI inflation (August), retail sales advance (August) and University of Michigan consumer sentiment and inflation expectations data. Out of Euro-zone, Germany’s ZEW Survey expectations (September) and European Central Bank’s monetary policy decision will be crucial. UK’s monthly job report (August) and monthly GDP data (July) will be in focus, too. China’s retail sales and industrial production (August) will also entertain market participants.
Presently, the fortune of gold is closely tied to the US yields and the Dollar Index. A slower pace of corporate bond issuance may ease downside pressure on the US treasuries, which will support the metal. The US Dollar may be due for a correction after such a long stretch of winning streak, which will be supportive, too.
Overall, we expect gold to remain choppy and volatile next week with a slight negative bias, though the metal is widely expected to be range-bound ahead of the US inflation data to be released Wednesday.
Support is at $1915/$1900/$1885. Resistance is seen at $1932/$1955/$1965.
(The Author is Associate Vice President, Fundamental Currencies and Commodities at Sharekhan)
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