Gold Languishes On Hawkish Fed Outlook, Strong Dollar And Weak Retail Demand

Gold Languishes On Hawkish Fed Outlook, Strong Dollar And Weak Retail Demand

By Jigar Trivedi

Gold fell below $1,830 an ounce, sliding to its weakest levels in six weeks as stronger-than-expected US economic data and hawkish remarks from Fed officials weighed on the metal. Latest data showed that US producer prices increased 0.7% M-o-M in January, the most in seven months and higher than market forecasts of 0.4%, while weekly jobless claims unexpectedly fell. These reports came on the heels of robust retail sales data and a hotter-than-expected CPI reading, supporting the case for further monetary tightening. Meanwhile, Cleveland Fed President Loretta Mester said she sees a “compelling economic case” for another 50 basis point rate hikes, while St. Louis Fed President James Bullard said he would not rule out backing a half-percentage point increase at the Fed’s March meeting.

US 10-Year Treasury Yield Rises after PPI, Claims Data

The yield on the US 10-year Treasury note, seen as a proxy for global borrowing costs, was above 3.8%, a level not seen in more than a month, as investors adjust their portfolios for a higher terminal rate. The closely watched US CPI reading for January landed at 6.4%, the lowest since October 2021, still above economists’ forecast of 6.2%. Producer prices also came above forecasts while initial jobless claims surprised on the downside, which supports Fed’s view that the labour market remains tight and inflation elevated, opening the door to further rate hikes. Money markets have now priced at least two more 25 basis point rate hikes this year and see interest rates peaking at 5.2% by July.

US Producer Prices rise the most in 7 Months

Producer prices for final demand in the US increased 0.7% month-over-month in January of 2023, the most in seven months and higher than market forecasts of 0.4%. Goods prices jumped 1.2%, also the largest increase since rising 2.1% in June 2022, led by a 6.2% surge in gasoline cost.

The retail demand slips in the second largest consumer market

India’s January gold imports plunged 76% from a year earlier to a 32-month low on subdued demand after domestic prices rallied to record highs and as jewellers postponed purchases, hoping for a reduction in import duty. Lower imports by the world’s second-biggest bullion consumer could weigh on benchmark gold prices , but the fall may help in bringing down India’s trade deficit and support the ailing rupee.

Outlook

Monday is the holiday in the US on account for Washington’s Birthday. On Tuesday, a provisional number for manufacturing PMI of February will come out for the UK, the US, EU & Germany. The US will also release existing home sales for January on Tuesday. On Thursday UK will release GDP for Q4 and January’s CPI for Euro. Japan will observe holiday on Thursday. Lastly, on Friday, US will release Core PCE Price index for January. Hence from data point of view, the week will be an important one. Looking at the technical chart set up, $1,825-$1,830 an ounce is a crucial support point. We don’t deny possibility of a rebound from here but the technical tools are signaling further pain in the coming sessions. $1,800 – 1,780 an ounce is a good support. On flip side $1,845 – $1,870 is a resistance. MCX Gold April has a good support near Rs. 55,000 per 10 gram and we recommend to short on every bounce.

(Jigar Trivedi, Senior Research Analyst – Currencies & Commodities, Reliance Securities. Views are author’s own. Please consult your financial advisor before investing.)