Can gold bugs reclaim $2000 on Fed-pause bets? The Week Ahead

Can gold bugs reclaim $2000 on Fed-pause bets? The Week Ahead

Over the past week we have seen trade reprice and then fully reverse bets of a Fed hike in June. And with members now heading into a blackout period, where comments to the media on monetary policy are a big no go, traders will have to rely exclusively on data to assess the likelihood of another pause or hike. And if traders continue to believe no action is the course, it cold help gold reclaim (and remain above) $2000 if the US dollar continues to correct lower. We also have a potential live meeting from the RBA on Tuesday, given inflation points the wrong way (and not by a small margin). Final PMIs are released for Asia, Europe and the US but eyes will be mostly on the ISM services report to see if services inflation can chill out. China also release key inflation data on Friday.

 

• The week that was:
• The week ahead (calendar):
• The week ahead (key events and themes):

 

The week that was:

• Debt ceiling negotiations dragged on as expected but the bill made it to a vote, past the Republican House, through the Senate and is now on Biden’s desk ready to be signed into law (at the time of writing)

• Whilst higher PCE inflation last week saw bets for a Fed June hike rejuvenated, the Fed’s Vice Chair Jefferson hinted at a pause in June but also warned it may not be the end of the tightening cycle
• A host of softer than expected inflation prints from Spain, France and Germany helped push the euro down to a 3-month low
• Yet hawkish comments from ECB President Lagarde combined with dovish comments form some Fed members saw EUR/USD promptly reverse the week’s losses
• Tech stocks were the clear winners of Wall Street in May with the Nasdaq rising to a 13-month high (view the monthly candles of major indices for May)
• The Hang Seng entered a technical bear market (20% lower from its previous peak)
• China’s manufacturing PMI contracted for a second month and at its fastest pace in six, whilst services PMI fell to a 4-month low
• Australian inflation was uncomfortably strong at 0.5% m/m and 6.8% y/y, which keeps the pressure on the RBA to hike on Tuesday
• Inflationary pressures continued to cool with the CRB commodities index closing at a 16-month low

 

The week ahead (calendar):

   

Earnings This Week

Look at the corporate calendar and find out what stocks will be reporting results in Earnings This Week.

 

The week ahead (key events and themes):

1. Fed blackout period
2. Gold could shine if US data allows
3. Debt-ceiling bill and the potential for the US government to default
4. China CPI and PPI
5. RBA cash rate decision and AU GDP
6. ISM services PMI

 

Fed members are to give us a break

Fed members have been out in full force over the last couple of weeks as they each individually sway market opinions for their policy outlook (whilst they can) ahead of the Fed blackout period, which kicks in this weekend.

And that means they cannot communicate to the media about monetary policy for the two weeks leading up to their June 14^th interest rate decision. This time last week I’d have argued that, overall, Fed members were leaning towards the more hawkish side when looking through their recent comments (of which there have been many). Yet with Powell earlier hinting that he favours a pause, then Vice-Chair Jefferson eluding to the same tone that a pause may be warranted although not necessarily the peak rate, odds now firmly favour a pause. In fact, over the past week we saw market pricing for a hike rise from around 17% to over 70%, and now back to below 25%.

 

Gold could shine if US data allows

The resurgence of bets the Fed could hold has helped gold climb for four consecutive days. And it would likely be much higher were the debt-ceiling talks to fall apart. But as we head into next week, bad news for the US could be good news for gold bugs and help the yellow metal climb back above $2000.

We can see on the daily chart that prices have rallied for a key support zone around 1935 which included the 1934 lows, 100-dy EMA and November trendline. $2000 seems within easy reach, and perhaps even achievable this week should NFP disappoint enough. Yet the RSI (2) is within overbought territory to warn of a near-term inflection point, so perhaps the rally could lose some steam ahead of the weekend. Furthermore, $2000 is likely to be a focal point for technical traders and potentially a pivotal level next week for investors to plan their trades around.

 

Will US congress actually get a debt-ceiling deal over the line in time?

The bill made it way past the Republican House of representatives and is now on its way to the Senate. As things stand, a deal is on the horizon with just enough time on the clock to avoid a default. The US Treasury estimate that the government will run out of cash by the 4^th of June, which leaves little room for error for the US to avoid a catastrophe. And investors may be a little twitchy if big steps are achieved ahead of Friday’s close, and that could leave markets vulnerable to nasty gaps at next week’s open if somehow the bills is fumbled over the weekend. And that could do wonders for gold bugs.

 

The RBA announce their cash rate decision on Tuesday June 6^th

We thought we were cruising towards another RBA pause, until this week’s inflation data rose at an undesirable rate of 0.5% m/m and 6.8% y/y. And this is after the RBA surprised markets with a 25bp with the Governor quickly remarking that inflation remained “too high”.

RBA cash rate futures currently imply just a 22% chance of a hike, but it should be remembered that the same metric assumed a 100% chance of a pause in May – not the hike that occurred. Personally, I believe it is closer to a 50/50 chance they could hike on Tuesday. They may want to send a message they finally mean business with inflation – or perhaps wait for Wednesday’s GDP figures before reassessing in July.

Then again, even if they do pause it seems very unlikely the RBA have reached their peak rate with current levels of inflation and concerns it will take a while to drift lower. And I’m not alone, with ANZ bank forecasting a 25bp hike in August, and Credit Suisse expecting 75bp worth of hikes by September due to the increased likelihood that services inflation will remain high.

Perhaps a better way to look at this from a trader’s perspective is where AUD/USD sits relative to expectations. Would a pause really send it much lower? Or could a hike prompt some short covering, given large speculators remains net short and the consensus is for a hold next week. Like inflation, risks may be to the upside for AUD/USD with the Fed in pause mode. 

 

 

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

 

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