Gold benefits from dollar weakness; traders should buy on dips

Gold benefits from dollar weakness; traders should buy on dips

By Jigar Trivedi

Comex Gold held above $1,950 an ounce on Friday, benefiting mainly from the dollar’s weakness as the Federal Reserve paused its tightening campaign at a time other major central banks are still raising interest rates. Still, the metal remains close to three-month lows as the Fed hinted at two more quarter-point rate increases this year, while the ECB delivered another 25 basis point rate hike on Thursday and signaled further tightening. The Bank of England is also set to raise rates again at its June policy meeting, a month marked by surprise rate increases from the Reserve Bank of Australia and the Bank of Canada. Meanwhile, the People’s Bank of China lowered key short-term interest rates this week for the first time in ten months, while the Bank of Japan maintained its ultra-easy monetary policy on Friday.

Fed left rates unchanged but expects more hikes

The Fed left the target for the funds rate unchanged at 5%-5.25%, as expected, but signaled rates may go to 5.6% by year-end if the economy and inflation do not slow down more. It marks the first pause in the tightening campaign following ten consecutive hikes that lifted borrowing costs to the highest level since September 2007. The funds rate is now seen higher at 5.6% this year, compared to 5.1% projected in March. Upward revisions were also made for 2024 and 2025. The GDP is seen rising 1% this year, higher than the 0.4% seen in March, while growth for both 2024 and 2025 was revised lower.

The BOJ is widely expected to maintain ultra-easy monetary policy and make no adjustments to its current yield curve control as Japan’s ongoing economic recovery is being countered by slowing global growth. Investors also continued to take profits following a strong rally that brought the benchmark indexes to over three-decade highs.

ECB hiked rates for an 8th straight time

The ECB raised interest rates by another 25 basis points during its June meeting, bringing the rate on main refinancing operations to 4%, the highest level since the 2008 financial crisis, and the rate on the deposit facility to a 22-year high of 3.5%. This marked the eighth consecutive rate hike, even though the bloc entered a recession at the beginning of 2023, and as both the headline and core inflation rates remain significantly above the ECB’s target of 2%. The central bank has also revised its inflation forecasts upwards and slightly reduced its growth projections.

Outlook for next week

Monday is the holiday in the US. Tuesday Fed member, James Bullard will deliver the speech. More importantly, on Wednesday Fed Chair Powell will testify and that will be monitored closely to gauge the market trend. Thursday Bank of England will hold monetary policy, yet another crucial central banking event followed by second day of testimony for the Fed chair. Lastly on Friday, FOMC members Bullard, Bostic will again deliver a speech. Hence the week is expected to be volatile. For Comex gold price, $1,940 – 1,910 an ounce is a good support zone and on a flip side, $1990 is a resistance. For MCX Gold August futures, Rs. 59,000 – 58,800 per 10 gram is a strong support whereas Rs. 60,000 is a strong resistance for the gold rate. We recommend buy on dips strategy.

(Jigar Trivedi, Senior Research Analyst – Currencies & Commodities at Reliance Securities Limited. Views expressed are author’s own.)