By Jigar Trivedi
Gold weakened past $1,860 an ounce on Friday and set to decline for the second straight week, weighed down by hawkish signals from Federal Reserve officials who reiterated their commitment to bring down inflation with more rate increases. Those developments came on the heels of stronger-than-expected US jobs numbers which could fuel consumer spending that would maintain upward pressure on inflation.
Investors now look ahead to next week’s US inflation data for clues about the trajectory of Fed policy tightening. Gold is highly sensitive to the rates outlook as higher interest rates raise the opportunity cost of holding non-yielding bullion and vice versa.
A senior Federal Reserve official said the economy will need higher borrowing costs for a few years to bring down inflation and prevent price pressures from strengthening.
New York Fed President John Williams said that “we still have some work to do to get interest rates in the right place”. “We need a sufficiently restrictive stance” of rates, and “we’re going to need to maintain that for a few years to make sure we get inflation to 2%.” Fed officials last week approved lifting their benchmark federal-funds rate by a quarter-percentage point to a range between 4.5% and 4.75%. That was a smaller increase than at their previous two policy meetings, when they raised it by a half point in December and 0.75 point in November.
According to projections released after their December meeting, most officials thought they would raise the fed-funds rate to 5.1% this year, which would imply quarter-point rate increases at their next two meetings, in March and May. More than a third of officials anticipated lifting the rate above 5.25%, which would call for another increase in June. No officials projected rate cuts this year.
Separately, Fed governor Christopher Waller said he was optimistic that the Fed’s rate increases were slowing the economy. “We are seeing that effort begin to pay off, but we have farther to go,” he said in remarks Wednesday at Arkansas State University in Jonesboro, Ark. “And it might be a long fight, with interest rates higher for longer than some are currently expecting.” Next week Japan and Euro zone will release GDP numbers but most importantly, Tuesday evening US will release its monthly inflation following on Wednesday UK will release inflation for January, US will release monthly retail sales and business inventories for January lastly, on Thursday US will release housing starts numbers hence the dollar index is likely to be volatile so as the yellow metal.
MCX Gold April has a strong support near Rs. 56,000 and 55,400 per 10 gram. On flip side a strong resistance is seen near Rs. 57,500 per 10 gram. Outlook is positive however, the focus will be on the US inflation numbers hence expect a volatile session.
(Jigar Trivedi, Senior Research Analyst – Currencies & Commodities, Reliance Securities. Views expressed are author’s own.)