US Services activity slowed more than expected in July, but manufacturing activity rebounded to a three-month high.
At the same time, European and UK Services activity reached a six-month low, causing weakness in the Euro and Pound.
The Dollar index started to ease on Tuesday due to Chinese optimism and ahead of the FOMC meeting, leading to a recovery in gold prices during the first half of the week.
China pledged to increase policy support for its struggling economy, particularly by boosting domestic demand and helping the property market.
The US Fed policy outcome was largely as expected. During the July FOMC meeting, the Federal Reserve raised the target range for the federal funds rate by 25 bps to 5.25% – 5.5%, bringing borrowing costs to the highest level since January 2001.
The yield on the US 10-year Treasury note decreased towards the 3.85% level, while the Dollar index slipped towards 101 levels, as Fed Chair Jerome Powell’s comments were seen as leaning towards the dovish side. Powell insisted that the central bank would take a “data-dependent” approach going forward to determine additional rate hikes and clarified that no decision has been made to raise borrowing costs further.
The US Fed refrained from explicitly stating that borrowing costs are sufficiently restrictive, suggesting that another rate hike may be possible in upcoming meetings.
However, swaps were not pricing in another September rate hike, possibly due to signs of cooling inflation.
The major turnaround in gold prices occurred on Thursday, following a series of positive economic data from the US, while a slightly dovish ECB policy outcome boosted the Dollar index and treasury yields.
The US 10-year yields exceeded 4%, while the Dollar index rose above 102 levels. The biggest surprise came from US GDP, which expanded by 2.4% in the second quarter, well above market expectations of 1.8%, showing the economy’s resilience to higher interest rates.
In addition, US pending home sales rose for the first time in four months, the goods trade balance narrowed in June, jobless claims fell to a five-month low, and durable goods orders exceeded expectations.
The resilient US economy and elevated price pressures increased the likelihood of a September rate hike, which raised the opportunity cost of holding non-interest-bearing precious metals.
Meanwhile, the European Central Bank raised interest rates by 25 basis points, marking the ninth consecutive rate hike. ECB President Christine Lagarde avoided giving any forward guidance for the next decision.
During the press conference, Lagarde stated that all options remained on the table, causing the Euro to decline as investors interpreted it as a dovish tilt.
In the coming week, the US Labour data and ISM PMIs will be in the spotlight. The Bank of England monetary policy meeting and final PMIs from other major economies will contribute to the volatility.
The Bank of England is expected to sound hawkish, which could weaken the greenback. Swaps have already started pricing in further hikes from the Fed this year, according to the June statement of economic projections.
Any signs of strength in the US jobs market or expansion in ISM PMIs could increase the likelihood of a September hike.
The US economic resilience supports the Fed’s fight against inflation. Gold may trade with a bearish bias as short-term macro headwinds persist.
(The author, Ravindra V. Rao, is VP-Head Commodity Research at Kotak Securities Limited)
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