Today’s market analysis on behalf of Rania Gule Market Analyst at XS.com
Gold (XAU/USD) struggles to benefit from a good rebound from the $2315 – $2314 zone, trading within a tight range during Tuesday’s morning session. Bias leans towards upward movement amid strong expectations of the Federal Reserve cutting interest rates later this year, as yesterday’s US data revealed a slowdown in manufacturing and economic activity, pushing the US dollar to its lowest level in nearly two months, supporting non-yielding gold.
Continued geopolitical risks support positive short-term expectations for gold prices, potentially further boosting its rise. Therefore, any declines may be seen as buying opportunities and are likely to remain limited. Traders may prefer to wait for key US data releases this week, including the Non-Farm Payrolls (NFP) report on Friday. Major central bank decisions such as the Bank of Canada (BoC) decision on Wednesday and the European Central Bank (ECB) meeting on Thursday could also provide momentum for gold and help determine short-term direction.
From my perspective, gold is likely to be supported during the summer as investors assess possibilities of future interest rate movements by major central banks and Asian demand remains high. While gold prices retreated from all-time highs in April after the Federal Reserve hinted at delaying expected interest rate cuts indefinitely, it found support as traders covered short positions following a weak series of US data, including a core personal consumption expenditure decline on Friday. Thus, price coverage and support occur each time the market price in new data.
Given that the Federal Reserve’s preferred inflation gauge shows a steady move towards decline, the gold market is expected to receive good support during the summer. However, a significant increase is not expected at the moment, as central bank officials will need more evidence that their economic models reflect reality and that interest rates are already sufficiently restrained to control inflation. In my opinion, gold movements and investor positions will largely depend on data.
Gold receives additional support from Asian purchases as a hedge against currency devaluation. Recent Chinese purchases, as a counterbalance to the yuan’s decline, also contribute. Additionally, the US inflation report was in line with estimates, enhancing expectations that the Federal Reserve will cut interest rates this year, undermining the US dollar and acting as a support for gold. The core personal consumption expenditure index, which excludes volatile food and energy prices, matched expectations, rising by 2.8% every year, while personal income and spending increased by 0.3% and 0.2%, respectively.
The data raise expectations of an imminent Federal Reserve interest rate cut this year and lead to further declines in US Treasury bond yields, keeping US dollar bulls on the defensive and providing support for non-yielding gold. Additionally, I believe that tensions in the Middle East are another factor limiting the downside for gold, as a haven, although the overall positive tone in equity markets should curb short-term bullishness.
At the same time, the Caixin S&P Global Purchasing Managers’ Index for the Chinese manufacturing sector rose to 51.7 in May from 51.4 previously, indicating stability in the world’s second-largest economy, and boosting investor confidence in the markets.
Recent optimism regarding a new ceasefire plan in Gaza announced by US President Joe Biden prevents traders from making strong bullish bets on gold in the short term, amid anticipation of important economic data this week including the Non-Farm Payrolls report and major central bank event risks – the Bank of Canada policy decision on Wednesday, followed by the European Central Bank meeting on Thursday. Thus, price action will remain subject to economic data primarily.
