Gold reached a new high watermark as investors position for the arrival of a lower interest rate environment. Comments from the Fed Chairman Jerome Powell both last week and this week appear to be setting the table for the arrival of a US rate cut in the coming months. Powell mentioned that the Fed won’t need to wait for inflation to hit 2% before reducing rates, which combined with a recent soft patch of US macro data (such as jobs data and CPI figures) seems to suggest that the US central bank is ready to loosen monetary conditions in the coming months (with a September rate cut already fully priced in).
The Bond market tells the story with yields on the slide, which boosted the appeal of gold. The spot price had moved to a new record just shy of the $2470 level (as at the start of Asian trading hours on Wednesday). Gold seems primed for a potential run at the $2500 level in the near-term, should the USD and bond yields remain on the backfoot and if inflationary indicators continue to cooperate (by not shifting higher).
The Dollar Index (DXY) did recover some ground during the New York session to move to 104.20, which is well down from the 105 handle it was trading at this time last week. This downward shift in the USD reflects the increased expectation that at least one rate cut from the Fed is near and that the yield differential enjoyed by the Dollar could be on the cusp of being reduced.
The USDJPY rate has fallen back to the 158 handle, in part due to this fresh round of greenback weakness and in part due to some suspected intervention. Japanese officials will probably have been relieved to see the softer US CPI figures, as they faced a tough task in recent months in trying fight the treasury market in their efforts to protect the yen. So, the current sub-160 USDJPY levels will be likely sitting more comfortably with those in the Japanese Ministry of Finance. But will it last? It could depend on how US inflation prints fare between now and September. In the meantime, levels to watch on USDJPY include support at 157.99 and 157.55, while resistance sits at 158.97 and further out at 159.40.
Oil has been on a softer footing after Chinese macro data missed the mark. GDP and retail sales figures from China on Monday undershot expectations, whilst trade data last week showed that import figures underwhelmed (though export data was better). For the WTI contract (US oil), support waits at $79.17, while resistance is at $80.83 and $81.70. However, with expectations that US rate cuts are moving closer, this could be supportive of oil from a demand perspective.
Equity markets remain buoyed by prospects of looser monetary conditions, whilst Q2 earnings results so far have added to the momentum. From an index point of view, the Nasdaq has been leading the way with gains of 25% this year, however recent equity market moves suggest that traders are getting the confidence to branch out from the tech sector, which has done much of the heavy lifting, and into other sectors now that rate cuts on the horizon.
For the rest of the week, investors will be listening to the messaging from Fed officials who are due to speak, whilst the ECB meeting on Thursday will also be closely watched. The ECB are expected to sit tight this meeting and not cut rates, though we will be watching for clues as to when the European central bank may look to act again following their June rate cut.
