Gold prices are impacted by a strong dollar and potential interest rate hikes hinted in the Fed’s July meeting minutes due to inflation concerns. Additionally, the US labor market tightness continues, with unemployment claims dropping, but the market shows signs of softening.
By Jigar Trivedi
Gold held below $1,900 an ounce on Friday and set to decline for the fourth straight week, weighed down by a strong dollar and Treasury yields as minutes of the Fed’s July meeting suggested further interest rate hikes could be ahead due to upside risks to inflation. Latest data also showed that the number of Americans filing new claims for unemployment benefits fell last week, pointing to continued tightness in the labor market. Elsewhere, data showed that Japan’s core inflation rate slowed as expected in July but remained above the Bank of Japan’s target for the 16th straight month. Investors also monitored China’s real estate sector after top developer Evergrande filed for protection from creditors in a US bankruptcy court.
Dollar heads for 5th weekly advance
The dollar index eased to around 103.2 and on track to advance for the fifth straight week, as minutes of the Fed’s July meeting showed that policymakers stressed that upside risks to inflation remain, leaving the door open to further policy tightening. However, some participants flagged the economic risks of pushing rates too far, emphasizing that future rate decisions would depend on incoming data. The dollar is set to gain against most major currencies this week, but remains down against the sterling as key measures of price growth monitored by the Bank of England failed to ease in July.
US initial jobless claims ease as expected
The number of Americans filing for unemployment benefits fell by 11,000 from the prior week’s upwardly revised seven-week high to 239,000 on the week ending August 12th, in line with expectations of 240,000. Despite remaining low at historical standards, the figure remained sharply above lows from the second half of July and suggested that the US labor market is starting to soften from stubbornly tight levels since the start of the year, loosely aligning with recent bets that the Federal Reserve may refrain from tightening monetary policy further this year.
Fed Minutes: Fed leaves door open to further tightening
Most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy, minutes from the latest meeting showed. However, some participants cited the risks to the economy of pushing rates too far. Policymakers agreed that the level of uncertainty remained high and that future rate decisions would depend on data arriving in the coming months to help clarify the extent to which the disinflation process was continuing. The Fed raised the fed funds rate by 25bps to 5.25%-5.5% in July, the highest since January 2001.
US 10-Year treasury yield approaches 15-year highs
The yield on the US 10-year Treasury note rose above the 4.2% mark in August, hovering close to levels last seen in 2007 as markets fretted about prolonged periods of restrictive monetary policy. The remarks from Minneapolis Fed President Neel Kashkari underscored the central bank’s caution with risks of higher inflation, hinting that the Fed may still hike rates to a higher level. Treasury prices also remained under pressure from concerns of higher bond supply after the government increased the amount of debt auctioned at the beginning of the month.
Outlook
All eyes will be on the Jerome Powell’s speech next week when the central bankers will meet at Jackson Hole Symposium which is scheduled from Thursday to Sunday and any remarks regarding global inflation, rate cycle and growth concerns or even development regarding Russia – Ukraine war may spark safe buying in the yellow metal. $1,900 an ounce is a first major hurdle and $1,930 an ounce is a resistance. On a lower side, gold price sees $1870 an ounce is a strong support. We recommend to go long on every dip.
(Jigar Trivedi, Senior Research Analyst – Currencies & Commodities, Reliance Securities Limited. Views expressed are the author’s own. Please consult your financial advisor before investing.)
Source:financialexpress.com