Gold Fundamental Forecast – Bearish
- Gold costs gained only one %, nevertheless it was one of the best week since mid-June
- Markets are more and more pricing in a Fed pivot regardless of 9.1% y/y inflation
- All eyes are on the Federal Reserve, US GDP and PCE knowledge within the week forward
Gold costs noticed a slight restoration this previous week, with XAU/USD rising about one %. While it was not a lot, that was one of the best weekly efficiency because the center of June. A mixture of a weaker US Dollar and falling Treasury yields doubtless benefited the anti-fiat yellow steel. Is there extra scope right here for gold to proceed rallying?
To perceive the reversal in gold higher, you want to examine what the markets count on the Federal Reserve to do forward. All eyes are on its subsequent rate of interest announcement on Wednesday, the place one other 75-basis level fee hike is seen. This follows still-high US inflation, with the headline fee operating at 9.1% y/y and constantly beating economists’ estimates.
Yet, a extra hawkish Fed ought to spice up the US Dollar and bond yields, working in opposition to gold. That has been the broader story this yr, therefore the persistent decline in XAU/USD. Global financial tightening can also be working in opposition to gold. But, evidently this previous week, the markets centered extra on what may occur additional down the highway.
Expectations of a Fed pivot subsequent yr climbed, with markets seeing 2 cuts in 2023. This has been related to deeper inversion of the yield curve, particularly the 10-year and 2-year fee unfold. Meanwhile, economists have been downgrading 2023 actual development expectations. Despite this, near-term breakeven charges have been rising lately, indicating rising inflation expectations.
All this appears to color a narrative of the markets seeing the Fed maybe favoring boosting financial development regardless of inflation nonetheless being at 40-year highs. Could markets be getting forward of themselves? Well, we would get a greater thought this week with the Fed. If the central financial institution continues to face agency on preventing inflation, it appears we may be setting ourselves up for disappointment.
In such an end result, the US Dollar may rally alongside Treasury yields. That wouldn’t bode properly for the yellow steel. Outside of the central financial institution, the primary estimate of Q2 US GDP knowledge can also be due. 0.4% q/q development is seen, up from the -1.6% from Q1. However, a unfavorable print would imply 2 consecutive contractions of GDP. That is a generally cited standards for the technical definition of a recession.
Then, the week will wrap up with PCE knowledge, which is the Fed’s most popular gauge of inflation. Another robust print may maintain the central financial institution on its toes. As such, it’d be too early to name a turnaround in gold. I’d go additional to say that the dangers appear skewed to the draw back within the week forward. As such, it’s a bearish elementary name.
Gold Fundamental Drivers
–— Written by Daniel Dubrovsky, Strategist for DailyFX.com
To contact Daniel, use the feedback part beneath or @ddubrovskyFX on Twitter