By Jigar Trivedi
Comex gold finished the week 0.60% or $11 higher at $1,866 an ounce nonetheless it began the week on a subdued note, weighed down by hawkish remarks from Fed Chair Jerome Powell and hotter-than-expected US employment numbers. Powell warned that the ultimate level of interest rates could be higher than anticipated in light of strong economic data, and the central bank would be prepared to quicken its hike pace if needed. Data released on Wednesday also showed US private employment rose more than anticipated in February, pointing to ongoing tightness in the labor market. Investors see the Fed raise interest rates by 50 basis points in March. They are also looking ahead to the Bank of Japan’s policy decision on Friday, which would be BOJ Governor Haruhiko Kuroda’s final meeting.
Gold prices gained almost 2% to above $1,860 an ounce on Friday, after the payrolls report sent the dollar down. The US economy added 311K jobs in February, way more than expected, but the unemployment rate edged higher to 3.6% and wage growth slowed, easing expectations about the need for higher interest rates.
Traders now seem to be evenly divided on whether the Fed will opt for a 25bps or 50bps increase on March 22nd. Meanwhile, hawkish remarks from ECB policymakers continue to point to further increases in borrowing costs. In Canada, the central bank already paused the tightening cycle and the Bank of Japan hold its ultra-easing monetary policy as expected.
Dollar edges lower after mixed payrolls
The dollar index weakened over 1% to around 104 on Friday as investors digested the labor market report. Earlier in the week, the dollar hit more than a 3-month high of 105.5 after Fed Chair Powell told the US Congress that the ultimate level of interest rates could be higher than anticipated in light of strong economic data and that the central bank would be prepared to increase the pace of tightening if needed. After the NFP release, expectations eased about the need for higher interest rates.
The upcoming week will be crucial for market participants and policymakers, as the release of the US inflation report is likely to dictate the future path for interest rates. The annual inflation is seen easing to 6% while the monthly rate will likely hit 0.4%. Also, the core consumer prices likely grew 0.4% over the previous month, resulting in the annual rate easing to 5.5% from 5.6%. On the inflation front, it will be also interesting to follow producer price index, exports and imports prices, and inflation expectations for March. Investors will be also paying close attention to retail sales, with forecasts pointing to a modest 0.2% month-on-month gain in February, suggesting tighter financial conditions dragged consumer spending. Other important releases are preliminary reading for the University of Michigan’s consumer sentiment, industrial production and housing data including building permits, housing starts and NAHB Housing Market Index.
In Europe, the ECB is expected to raise interest rates by another 50 bps to combat high inflation. Data showed the bloc’s inflation slowed further to 8.5% in February, compared with the market consensus of 8.2%, while the core rate hit a fresh record. Traders will also carefully monitor President Christine Lagarde’s press conference, looking for clues on the size of the next rate hike after several policymakers backed the idea of more aggressive tightening. In the United Kingdom, all eyes turn to Chancellor Jeremy Hunt’s Spring Budget statement on March 15, as households hope for more help with energy bills. On economic data, important releases cover the Eurozone’s final inflation figures and industrial production; Germany’s wholesale prices; UK’s job report; and Italy’s industrial activity.
The yellow metal is likely to continue with Friday’s positive up move since market is divided over the Fed’s rate hike possibilities. The dollar index has also failed to break 106 on a higher side and dropped. Looking at the daily chart of the Comex Gold, $1,840 – 1,810 an ounce is a very good support. From here on, we may see a sharp up move till $1,900 an ounce in the coming sessions. The investment demand has not grown significantly in the year so far however, the coming week is an important one from an economic data point of view, we believe, the yellow metal to stay positive and MCX Gold April futures may appreciate to Rs. 57,000 per 10 gram.
(Jigar Trivedi, Senior Research Analyst – Currencies & Commodities, Reliance Securities. Views expressed are author’s own. Please consult your financial advisor before investing.)