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FOMC meets next week to trigger volatility in gold

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Spot gold closed with a weekly gain of nearly 0.30% at $1,923.81. Two-year US bond yields rose by 5bps, whereas the ten-year yields were up 7bps on a weekly basis. Tea US Dollar Index closed the week with a gain of 0.20% at 105.33.

The week ending September 15 was an eventful one. China’s PBoC, in its further attempt to stimulate its struggling economy, cut the Reserve Requirement Ratio (RRR) by 25bps, for the second time this year. The European Central Bank in its crucial monetary policy meets unexpectedly raised its main refinancing rate and deposit facility rate by 25bps each. Markets were uncertain about the monetary policy outcome, so the decision was somewhat surprising.

The Euro tumbled despite a rate hike as the Central Bank pared down growth forecasts for the bloc through 2025 and called inflation to be too high, though ECB President Christine Lagarde called the current rates to be restrictive enough to bring down inflation to the Bank’s desired goal of 2%. Market participants consider the latest ECB hike to be mostly the last hike in the Central Bank’s rate hike campaign which has seen ten consecutive rate hikes.

The euro-zone economic outlook has turned vulnerable due to steep rate hikes and rising oil prices, so sticky inflation is unlikely to support the single currency much anymore. The same is the case with the UK Pound, too. This spells a positive scenario for the US Dollar Index, which is somewhat bearish for gold.

The US CPI inflation data (August) showed that the US core CPI inflation rose 0.30% versus the forecast of 0.20%, thus registering the first increase in six months, whereas the headline CPI inflation yoy was up 3.70% as against the forecast of 3.60%.

Core CPI inflation increased 4.30% yoy and headline inflation was up 0.60% mom. Both these data matched the forecast. However, a 0.60% rise in mom reading, led by gasoline, rent, new cars and shelter, amounts to nearly 8% inflation on yoy basis, which is uncomfortably high.

It is to be noted that the CPI reading has risen for two straight months on yoy basis. The US inflation report doesn’t alter the view that the US Federal Reserve is likely to be in ‘wait and watch’ mode in the near future, which means no rate hike at the September FOMC meet; however, the inflation report does indicate a sticky inflation scenario that means that the probability of a rate hike later this year has increased.

Headline PPI Final demand figures for August were hotter than forecast. Similarly, US import and export price Indexes also topped the forecast, though the University of Michigan one-year and five-ten-year inflation expectations trailed the forecast.

US retail sales advance (August) at 0.60% topped the estimate of 1% as even retail sales control group data beat the forecast. Initial jobless claims (September 9) were reported to be 220K Vs the forecast of 225k.

China’s retail sales and industrial production data (August) topped the estimates as stimulus boosted the economic activities; However, market participants are still not sure about the stability and strength of the Chinese economy.

Next week, investors will focus on monetary policy decisions of the US Federal Reserve, Bank of England**,** and Bank of Japan. On the data front, the Euro-zone’s CPI inflation (August final), and manufacturing, services, and composite PMIs of Germany and the Euro-zone will be in focus. UK’s CPI inflation (August) and manufacturing, services**,** and composite PMIs data will also be crucial for markets. The US data docket includes housing starts (August) and S&P manufacturing, services, and composite PMIs.

Total known global gold ETF holdings are down 5% this year.

Gold bulls are betting on the possibility that the Federal Reserve, following the suit of the European Central Bank, may signal the end of its rate hike campaign at its September meeting.

The ten-year US yields are facing stiff resistance at 4.35%. If yields rise beyond this level, there could be a swift rise in yields, which will be bearish for the yellow metal.

Gold is expected to be volatile heading into the FOMC meet as traders try to preempt the Fed’s decision, though fundamentals of the metal are not really strong.

Support for the metal is at $1915/$1900. Resistance is at $1932/$1955.

(The author is Associate VP, Fundamental Currencies and Commodities, Sharekhan by BNP Paribas)


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