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Gold Prices May Fall as Dollar Gains on Fed Policy Bets, Risk Trends

Gold Prices May Fall as Dollar Gains on Fed Policy Bets, Risk Trends

Ilya Spivak, Head Strategist, APAC
Gold

GOLD FUNDAMENTAL FORECAST: BEARISH

  • Gold prices idle as FOMC, US jobs data offer divergent drivers
  • US CPI, Powell commentary likely to scatter Fed stimulus hopes
  • Global slowdown fears may drive haven demand for US Dollar

Check out the latest US Dollar forecast and see what is expected to drive prices through mid-year!

Gold prices struggled for direction last week, torn between competing influences from the FOMC monetary policy announcement and April’s US jobs report. The former sent prices lower as Chair Powell signaled the central bank’s outlook is firmly set at “neutral”, pushing back against recently growing speculation about a rate cut on the horizon. The latter offered a mixed view of the labor market, allowing for a bounce.

While headline payrolls growth registered north of expectations, the jobless rate seemingly fell for the wrong reason as labor force participation shrank and wage inflation printed slower than analysts projected. The markets seemed to focus on the downbeat aspects of the data set, with gold rising as a parallel drop in bond yields and the US Dollar bolstered the relative appeal of non-interest-bearing and anti-fiat assets.

This selective reading probably reflects a built-in desire for retracement before the week-end. The FOMC produced a sizable down move and placed prices squarely at trend support. An unmistakable signal from the jobs data was likely needed to deliver a decisive breakout, especially just ahead of the weekly close. Without such conviction, a correction may have been the de facto default response.

GOLD MAY FALL ON US CPI, POWELL SPEECH, GLOBAL SLOWDOWN FEARS

As the new week begins however, it is the Fed that is likely to have offered prices the longer-lasting catalyst. Scheduled commentary from Mr Powell may reinforce the central bank’s dubious stance on easing. That might be reinforced by incoming CPI data. It is expected to show that the headline and core measures of inflation moved to 2.1 percent in April, putting them close enough to target for the FOMC to stand aside.

Meanwhile, external news-flow may stoke global slowdown fears. Monetary policy decisions from the RBA and the RBNZ are likely to strike a downbeat tone. Chinese PMI numbers may underscore sluggish performance in the world’s second-largest economy. Finally, the European Commission looks likely to downgrade official EU economic forecasts.

On balance, all this bodes well for the Dollar, and thereby threatens gold. Worries about a downshift in the business cycle might animate de-risking, and the greenback will have relatively little to keep it from capitalizing on haven flows if the Fed is thought to eschew stimulus (at least in the near term). A stronger Greenback is anathema to the yellow metal, a go-to alternative to paper currency.

--- Written by Ilya Spivak, Sr. Currency Strategist for DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivakon Twitter

US DOLLAR TRADING RESOURCES

Other Weekly Fundamental Forecast:

Australian Forecast: Australian Dollar Could Face First RBA Rate Cut Since August 2016

GBP Forecast: Sterling (GBP) Price Outlook: Brexit Anger May Dampen Sterling Strength

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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