Gold might trade with a bearish bias next week as short-term macro headwinds persist

US Services activity slowed more than forecast in July, however, manufacturing activity rebounded to a three-month high.

At the same time, European and UK Services activity eased to a six-month low, leading to weakness in the Euro and Pound.

Dollar index started easing on Tuesday amid Chinese optimism and ahead of the FOMC meeting, which led to a recovery in gold prices during the first half of the week.

China pledged to ramp up policy support for its flagging economy, with a focus on boosting domestic demand and helping the ailing property market.

The US Fed policy outcome was mostly in line with expectations. During the July FOMC meeting, the Federal Reserve raised the target range for the federal funds rate by 25 bps to 5.25% – 5.5%, bringing borrowing costs to the highest level since January 2001.

The yield on the US 10-year Treasury note eased toward the 3.85% level, while the dollar index slipped towards 101 levels, as Fed chair Jerome Powell’s comments were perceived as leaning more towards the dovish side.The US Fed Chair Powell insisted that the central bank would take a “data-dependent” approach going forward when determining additional hikes and clarified that no decision to raise borrowing costs further has been made.

The US Fed refrained from explicitly stating that borrowing costs are sufficiently restrictive, suggesting that another rate hike may be on the table in upcoming meetings.

Still, swaps were not pricing in another September rate hike, amid signs of cooling inflation.

The major reversal in gold prices came on Thursday, after a slew of economic data from the US came on the upside, while slightly dovish ECB policy outcome boosted the dollar index and treasury yields.

The US 10-year yields surpassed 4%, while the dollar index rose above 102 levels. The major surprise came from US GDP, which expanded by 2.4% in the second quarter, well above market expectations of 1.8%, underscoring the economy’s resilience to higher interest rates.

Along with that, US pending home sales rose for the 1st time in four months, the goods trade balance narrowed in June, while jobless claims fell to a five-month low and durable goods orders topped expectations.

The resilient US economy and elevated price pressures raised the odds of a September rate hike, increasing the opportunity cost of holding the non-interest-bearing precious metals.

Meanwhile, the European Central Bank raised the interest rates by 25 basis points, a ninth consecutive rate hike. ECB President Christine Lagarde avoided giving any forward guidance for the next decision.

During the press conference, Lagarde said that all the options remained on the table, while the Euro tumbled as investors perceived it as a dovish tilt.

For the coming week, US Labour data and ISM PMIs will be in spotlight. Bank of England monetary policy meeting and Final PMIs from other major economies will add to the volatility.

The Bank of England is expected to sound hawkish, which might take some steam off the greenback. Swaps have started pricing in further hikes from the Fed this year, as per the June statement of economic projections.

Any signs of strength in the US Jobs market or expansion in ISM PMIs might raise the odds of a September hike.

The US economic resilience buttresses the Fed’s fight against inflation. Gold might trade with a bearish bias as short-term macro headwinds persist.

(The author By Ravindra V.Rao, is VP-Head Commodity Research, Kotak Securities Limited)

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