Gold may not break key support zone of $1930-$1920; US Fed policy eyed

It was relatively a lighter data week on the US data front. The highlight of the week was the US weekly jobless claims for June 3 week rising to the highest level in the post-pandemic period.

Excluding the disastrous COVID period, jobless claims reached the highest level in almost six years, thus stoking recession concerns.

A huge surge in jobless claims of 28,000 jobs to 261,000 jobs reflects the fact that the US job market is weakening. In addition, US ISM non-manufacturing report for May disappointed on multiple fronts.

The Federal Reserve, before the blackout period which began on June 3 and will last until June 25, indicated firmly that it will skip a rate hike at its June FOMC meeting. Federal Reserve Chair Powell and other officials like Harker and Jefferson are leaning towards a pause in June to assess the impact of steep rate hikes done so far in the last fifteen months.

The US Fed’s message of a skip is not without certain discontent among investors as the message came before the two key economic releases of the NFP report and CPI inflation report.

The ‘skip’ message combined with the softer-than-expected US ISM non-manufacturing report for May weighed on the US Dollar despite higher yields.The Reserve Bank of Australia and Bank of Canada showed resolve in their fight against inflation by hiking rates unexpectedly against the market consensus. Even the Swiss National Bank sounded the alarm on elevated inflation.

It is to be noted that Canada has a lower inflation rate and lower GDP growth than the US. So the Fed’s choice to skip hiking rates is somewhat debatable.

As the US Federal Reserve doesn’t like to surprise the markets, no rate hike in June is almost done deal. Even July rate hike odds have receded. Now, many economists don’t see the US Central Bank hiking rates further.

On the other hand, the Bank of England and the European Central Bank are unrelenting in their fight against inflation despite poor economic data reflecting growth concerns.

They have consistently conveyed that reining in inflation is their top priority. Although the US Federal Reserve may try to make it a hawkish pause at its June 14th FOMC meet, market participants may not give much credence to the possibility of further rate hikes.

A large gold sale of 81 tons by Turkey in response to its local situations led to a drop of 71 tons of gold in global official reserves in April, though it is unlikely to develop into a trend. As per a recent survey done by World Gold Council, 24% of global Central banks intend to add gold to their reserves in the next twelve months.

Next week is a busy week for the financial markets. Investors will look forward to the US retail sales (May), initial jobless claims (June 10), industrial production (May), Philadelphia Fed business outlook (June), and University of Michigan consumer inflation expectations.

Out of the UK, monthly job reports (May) and monthly GDP data will be crucial for the markets. The euro-zone will be in focus for Germany and Eurozone CPI (May) and ECB’s monetary policy decision.

Gold traders may wait for the US Federal Reserve’s monetary policy decision before taking a firm view of the yellow metal.

Unless the Federal Reserve unexpectedly hikes rates or CPI data is a blowout figure, gold may not break the key support zone of $1930-$1920. Resistance is at $1975/$1990.

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