By Bhavik Patel
Concerns over the Federal Reserve’s projected path of interest rate cuts this year, US Treasury rates and US dollar gained on Thursday, which precipitated a steep decline in gold prices. The precious metal’s decline came ahead of a critical inflation report due on Friday, with investors bracing for potential surprises that could force the Fed to recalibrate its monetary policy outlook.
The core PCE is the Fed’s preferred inflation gauge, capturing changes in consumer spending across a wide range of goods and services. The remarks made by Minneapolis Fed President Neel Kashkari, which hinted at the possibility of another rate hike, significantly affected market sentiment. The yield on the 10-year note hit a one-month high of 5.471%, while the yield on the 2-year note was 4.958%. Markets are pricing in a near-certainty that the Fed will retain its current benchmark interest rate of 5.25%–5.5% at the June meeting, according to the CME’s FedWatch tool.
Later in the year, however, there is a significant shift in the probability in favor of rate reduction, with a 12.3% chance in July and a 47% chance in September. The Chinese yuan is at its weakest level against the U.S. dollar since last November, with Chinese monetary authorities refraining from intervention against the strong greenback. The Thai baht, Indian Rupee and Indonesian rupiah are also at multi-year lows, as is the Japanese yen.
China on Gold
We think that China is increasing its holdings of metals, including precious metals like gold and silver as well as base metals like copper and zinc, in order to lessen the long-term effects of a declining Chinese yuan.
Gold market in MCX is consolidating in range of 71200-72700. Friday’s PCE data will give momentum to gold either upside or downside. Momentum oscillator is neutral at 50 and we believe 70,000 still proves to be strong base for the market. Any bullish trend will be reversed if Gold breaches below 70,000. For the week, we would recommend traders to wait for Friday’s PCE data to be published before taking any positions as market will react to the numbers. Any higher than expected PCE data will be negative for gold while if data comes lower or equal to expectation, then we may see gold consolidation continue for next week.
(Disclaimer: Bhavik Patel is a Senior Commodity/Currency Research Analyst at TradeBulls Securities. Views, recommendations, opinions expressed are personal and do not reflect the official position or policy of Financial Express Online. Readers are advised to consult qualified financial advisors before making any investment decisions. Reproducing this content without permission is prohibited.)