Dollar Trends Crucial, Limited Upside For Gold

New York (July 30)  Gold will continue to gain support if there is lacklustre US data and a further dollar sell-off, although the balance of risks suggests that the overall upside potential for gold is limited given the potential for a solid employment report.

There are a series of important data releases throughout the week with the Chicago PMI index on Monday ahead of Tuesday’s national ISM manufacturing index release while the non-manufacturing release is due for Thursday.

The ADP employment data is due on Wednesday ahead of the key BLS employment release on Friday.

Strong employment data would boost confidence in the US outlook and also revive expectations that the Federal Reserve will look to raise interest rates again this year. In this context, the dollar would be likely to strengthen while bond yields would tend to move higher.

This combination of factors would tend to put significant downward pressure on gold while a weak release would tend to undermine the currency and put upward pressure on gold.

US political trends will be monitored closely during the week ahead, especially with evidence of increased stresses and serious tensions within the White House staff and the on-going investigation into Russian involvement in the 2016 Presidential election. Further deterioration in confidence would tend to support gold, especially if there was a negative impact on equities.

Developments surrounding healthcare and tax reform will also be an important focus during the week ahead. Given deterioration in sentiment any move towards tax reform would tend to undermine gold support.

Central bank rhetoric will continue to be monitored closely during the week and generally hawkish comments would tend to increase bond yields and put downward pressure on gold.

If central banks push back against tightening expectations, precious metals would gain some support.

Any rhetoric from ECB and Fed officials will be particularly important, although there is only limited scope for comments during the summer holiday season in the US and Europe.

Trends in investor sentiment and ETF holdings will be watched closely during the week amid some signs that buying support has recovered ground over the past few days.

Evidence on physical gold demand will also be an important factor during the week.

Equity markets will also be an important focus during the week, especially with increased volatility during the past week. Any aggressive sell-off in global markets would trigger gold support.

ECONOMIC-CALENDAR