Attention to Gold Prices Next Week!
Gold prices started the week on a bullish note. It subsequently broke above $1,800 for the first time since mid-July. Despite soft inflation data, the dollar remained surprisingly resilient against its rivals. This also came under modest bearish pressure in the second half of the week. The Federal Reserve will release the minutes of its July policy meeting next week. Market participants will look for new clues as to the extent of the Fed's next rate hike.
US CPI Data Triggers Gold Prices Rally
Friday's impressive jobs report fueled the dollar rally. In addition, investors reserved their profits ahead of the highly anticipated US inflation data. Due to these developments, the dollar lost its strength at the beginning of the week. Gold, on the other hand, gained about 1% on Monday. It closed the day near $1,790. Fed Chair Michelle Bowman said she strongly supports super-high rate hikes to fight inflation. He noted, however, that market participant refrained from placing any further bets on a 75bps increase in September.
The trading activity on Tuesday remained stagnant. In this environment, gold continued to rise towards $1,800 as US Treasury bond yields retreated. Data from the US revealed that Unit Labor Costs increased by 10.8% in the second quarter. The data came in above the market expectation of 9.5%.
The U.S. Bureau of Labor Statistics reported Wednesday that the U.S. CPI fell from 9.1% in June to 8.5% year-on-year in July. Additionally, the Core CPI, which excludes volatile food and energy prices, remained unchanged at 5.9%. This data also fell short of analysts forecast of 6.1%. With the initial market reaction to the data, the dollar came under heavy selling pressure. Gold hit a one-month high above $1,800. According to the CME Group FedWatch Tool, the probability of a 75 basis point Fed rate hike in September fell from 70% to 30% before the CPI data were released. By contrast, the benchmark 10-year U.S. Treasury yield fell as much as 4%, fueling gold's rally.
The Fed Is Not Backing Down
However, FOMC policymakers reminded the markets that they will not overreact to a single inflation data. Minneapolis Fed President Neel Kashkari and San Francisco Fed President Mary Daly noted that they are still far from declaring victory over inflation. On a hawkish note, Chicago Fed President Charles Evans said the Fed was not done with rate hikes. He also added that he expects the federal funds rate to exceed 4%. Following these comments, the prospect of a 50 basis point September rate hike dropped below 60% on Thursday, causing gold to retreat from monthly highs to $1,790.
In an interview with Bloomberg late Thursday, Daly acknowledged that he has an open mind about a 75 basis point rate hike in September. The dollar rebounded on Friday, forcing gold to lag. Finally, the University of Michigan's Consumer Sentiment Survey for August revealed that the long-term inflation outlook improved from 2.9% to 3%. These data have helped the dollar continue to outpace its rivals. It limited the upward movement of gold ahead of the weekend.
“A sharp drop in Housing Starts could trigger a flight to gold”
Markets will look to Retail Sales data from China for fresh momentum earlier in the week. Investors expect sales to increase by 5% year-on-year in July, following a 3.1% increase in June. Market analyst Eren Sengezer makes the following assessment:
THE IMPACT OF THIS DATA ON THE VALUATION OF GOLD IS LIKELY TO BE SHORT-LIVED. HOWEVER, A WEAKER-THAN-EXPECTED DATA IS LIKELY TO SUPPRESS RISK SENTIMENT. IN ADDITION, IT CAN PULL GOLD DOWN, PROVIDING SUPPORT FOR THE DOLLAR, AND VICE VERSA.
On Tuesday, Building Permits and Housing Starts data for July will appear in the US economic dossier. The real estate market is under pressure due to rising mortgage rates. Investors are increasingly worried about a possible housing crisis. Therefore, a sharp drop in Housing Starts is likely to trigger a flight to safety, according to the analyst. It is also likely to help strengthen the dollar.
“Gold is likely to move inversely with US bond yields”
On Wednesday, the U.S. Census Bureau will release data on Retail Sales for July. Additionally, the FOMC will release the minutes of its July policy meeting. The publication appears to confirm that policymakers will continue to monitor the data before committing to a specific rate hike in September. The analyst interprets the impact of the minutes as follows:
IF THE MINUTES SHOW THAT THE FED SEES AN INCREASING RISK OF RECESSION, THE DOLLAR MAY LOSE ALTITUDE. THIS IS ALSO LIKELY TO OPEN THE DOOR FOR A HIGHER LEG FOR GOLD PRICES. ON THE OTHER HAND, INVESTORS MAY BE CONVINCED THAT THE FED WILL STAY ON AN AGGRESSIVE TIGHTENING PATH UNTIL THEY SEE SUCCESSIVE Decelerations IN INFLATION NUMBERS. IN THIS CASE, THEY CAN REASSESS THE FED'S INTEREST RATE OUTLOOK. IN SHORT, GOLD IS LIKELY TO MOVE INVERSELY PROPORTIONAL TO US BOND RATES IN THE MIDDLE OF THE WEEK.
Thursday's weekly Initial Jobless Claims and Philadelphia Federal Reserve Bank Manufacturing Survey will be the final data for the week. The market is not expected to react significantly to these data. The analyst summarizes the current situation as follows:
THE MARKET PRICING OF THE FED'S INTEREST RATE OUTLOOK WILL CONTINUE TO DRIVE THE DOLLAR'S VALUATION AND GOLD'S MOVEMENT IN THE SHORT TERM.
Gold Prices Technical View
Market analyst Eren Sengezer analyzes the technical outlook of gold as follows. The technical bullish trend of gold remains intact in the short term. The Relative Strength Index (RSI) indicator on the daily chart remains stable at around 60. Gold prices managed to close the last four days above the 50-day SMA.
However, it limited this week's advance to $1,800. It looks like buyers will avoid betting on more gold strength unless this resistance fails. Above this level, $1,830 (38.2% Fibonacci retracement of the latest uptrend) stands as the next bullish target ahead of $1,840, where the 100-day and 200-day SMAs are located. On the downside, key support seems to be formed at $1,780 (50-day SMA, Fibonacci 23.6% retracement) before $1,750 (20-day SMA).