Gold had a ‘bad day at the office’ despite there being no changes of any significance to the fundamental picture. The Dollar ticked modestly higher, treasury yields barely budged, and there were no major risk-on or risk-off moves on equity markets. And a potential Trump meeting in South Korea next week remains somewhat ‘up in the air’ (with Trump casting some doubt about the prospect of it occurring). So, what was the catalyst for gold having an ‘off’ day, to put it mildly?
The price of gold slumped more than 5% (on Tuesday during European/US trading hours) as profit taking moves started to snowball into a more pronounced sell-off in the precious metal. Understandably, there was high temptation for traders to take profit at price levels which have never been seen before in the gold market.
And with US CPI figures looming large this week, which could be consequential in determining how many Fed rate cuts we see over the coming quarter, there was extra impetus for investors to unwind positions. After gold’s record run, a correction of this nature was not unexpected, particularly given some overstretched and overbought indicators. From a technical perspective, support around the $4000 level could be key if gold still aspires to reach $4500 in the near-term.
Turning to crude, oil prices remain pressured albeit that US crude has bounced from its recent lows. However, expectations of excess supply (as predicted by the International Energy Agency) are keeping prices pinned. For US oil, support arrives at $56.70, while $58.40 shapes as the next resistance level on the top side. If President Trump and China happen to have a productive meeting (or if they meet at all) next week, any easing of trade tensions between the world’s two biggest economies could give the oil price a reprieve and alleviate some of the current selling pressures.
In FX, the USD is mounting a recovery effort now that regional banking fears have simmered down (for now at least) and while markets remain hopeful that we will avoid a scenario where the US imposes an additional 100% tariff on China (as has been threatened by Trump). The Dollar Index (DXY) slipped to around the 98 level at the end of last week but has since recovered to trade at 98.95 (as of Asian morning trading hours on Wednesday), helped in large part by another round of yen weakness. With Sanae Takaichi now becoming the first female Japanese Prime Minister, her pro-stimulus stance means we could see a less hawkish BOJ (Bank of Japan) approach to interest rates, which is hampering the yen (the USDJPY rate is up 1.2% over the last five days).
Looking ahead, Friday’s US CPI report is the headline macroeconomic event for the week. Expectations are that we will see a 0.4% monthly rise, with the annual rate climbing to 3.1% (from 2.9%). If we see inflation figures on the hotter side of expectations, this could make things uncomfortable for Jerome Powell and the Fed when trying to balance risks of higher inflation with a faltering labour market.
Global markets are dealing with several potential flashpoints, including but not limited to US-China trade tensions and the ongoing US government shutdown. The one thing that is providing a safety net of sorts to risk assets is the prospect that we will see a further two Fed rate cuts by year end, so if a hot CPI print happens to emerge on Friday this could throw a spanner in the works as far as risk appetite.
