Gold is declined by than 1% this week. The outlook for gold is bearish for the short to medium term.
Gold steadied above $1,930 an ounce on Friday but was still set to end the week lower, pressured by a strong dollar and rising Treasury yields amid a series of solid US economic data this week. Investors also braced for a key US monthly jobs report due for release later today that could influence the path for US interest rates. Meanwhile, the Bank of England lifted its policy rate by 25 basis points on Thursday and warned that borrowing costs were likely to stay high for some time, while a European Central Bank official made the case for keeping ECB’s interest rates at their current high levels for longer. The metal is on track to lose more than 1% this week, its worst weekly performance since late June.
Read More: Concord Biotech IPO Subscribed 0.58 Times On Day 1
Bank of England opts for smaller rate hike after better inflation news
Better news on inflation has, as expected, enabled the Bank of England to pivot back to a 25 basis-point rate hike this month. That follows a more aggressive 50bp hike back in June. Policymakers clearly don’t want to come across as complacent though, and there are plenty of references to the upside risks associated with inflation, as well as the recent surprises in wage growth. We shouldn’t be too surprised then that the Bank isn’t offering up much on what it intends to do next.
So, what next? Another hike in September seems likely, but by November we believe, BoE may trigger a pause. Whether or not we get another 25bp hike in November will therefore largely depend on whether services inflation has failed to slow, but our base case for now is that 5.50% in September will mark the peak for Bank Rate. Market pricing of a peak at 5.65% around the turn of the year therefore seems fair – and certainly much more reasonable than it did just a few weeks ago when investors briefly saw peak Bank Rate near 6.5%.
Read More: BLS E-Services files draft papers with Sebi to garner funds via IPO
Dollar eases ahead of key monthly jobs report
The dollar index eased below 102.4 on Friday, slipping for the second straight session as investors braced for a key monthly jobs report that could influence the path for US interest rates. Investors also assessed data showing US jobless claims remained near five-month lows last week and factory orders rose the most in two-and-a-half years in June, while services sector growth slowed in July. Still, the dollar is on track to gain for the third straight week as strong US economic data and rising Treasury yields supported the currency. A recent downgrade in US credit rating also raised concerns about the fiscal outlook, driving a flight towards the safe-haven dollar. The greenback weakened against major currencies on Friday, with the most pronounced selling activity against the risk-sensitive sterling and Australian dollar.
Read More: Markets To Focus On Q1 Earnings, RBI Interest Rate Decision, Global Trends This Week: Analysts
US Treasury yields continue to rise
The yield on the US 10-year Treasury note continued to rise to 4.18% in August, a level not seen since the beginning of November, as traders digest fresh economic data. Initial claims edged only slightly higher as expected, job cuts were the lowest in nearly a year and both labour costs and productivity beat forecasts, in a sign the labour market remains robust. The payrolls report due Friday will now be keenly watched for further updates on the jobs market.
The data continues to prove the US’s resilience to higher interest rates, spurring some bets of another rate hike this year. Meanwhile, the Treasury Department announced on Wednesday it plans to gradually increase the size of its auctions and will issue $103 billion of securities next week, slightly more than forecast. The day before, Fitch downgraded the US credit rating grade to AA+ from AAA, mentioning the expected fiscal deterioration over the next three years and a high and growing general government debt burden.
Outlook:
Reserve Bank of India will hold monetary policy on 10th August where the RBI is likely to keep rates unchanged and any move in the rupee will have its impact on the domestic gold prices otherwise, no major economic releases are due next week however, a strong dollar may weaken the gold price further to Rs 59,000 per 10 grams. The outlook is bearish for the short to medium term.
(Jigar Trivedi, Senior Research Analyst – Currencies & Commodities, Reliance Securities. Views expressed are author’s own. Please consult your financial advisor before investing.)
