Gold Price Benefits From Weak Data As Expectations Grow For Dovish Fed
New York (June 14) Gold prices are holding near session highs following weaker-than-expected U.S. retail sales and disappointing inflation data, but analysts warn investors to use some caution since the Federal Reserve could have the final say on whether this rally holds.
Gold prices saw a nearly 1% jump following the disappointing economic data, with some economists warning that this could prompt the Federal Reserve to take a dovish stance after an expected 25-basis-point rate hike Wednesday afternoon. August gold futures are holding on to most of their gains, last trading at $1,278.80 an ounce, up 0.80% on the day.
The disappointing data is created significant pressure on bond yields, which is driving the U.S. dollar lower. U.S. 10-year yields were last at 2.13%, down 7.8 basis points or more than 3% on the day.
Andrew Gratham, senior economist at CIBC World Markets, said that the weaker retail sales and consumer price index were the last things the Fed wanted to see on the final day of its two-day monetary policy meeting.
“Overall, with markets already expecting the Fed to hike this afternoon, the data likely isn't weak enough for them to do a U-turn on that. However, expect the communication to be fairly dovish regarding the pace of future hikes, particularly given the recent weakness in core CPI,” he said.
Paul Ashworth, chief U.S. economist at Capital Economics, said that he sees the latest inflation data as the most problematic for the Federal Reserve’s monetary policy path. The U.K.-Based research firm has been very bullish in interest rate hikes for this year.
“From out of nowhere we have now had three months of unusual weakness in underlying prices…That is a dilemma for Fed officials. Their first instinct was to attribute the weakness in core inflation to idiosyncratic factors, but this softness is a lot harder to ignore now,” he said. “It won’t stop the Fed from hiking interest rates later today, but it increases the downside risks to our forecast that there will be a further two rate hikes in the second half of this year.”
Sean Lusk, director of commercial hedging with Walsh Trading, agreed that the risks are rising that the Fed will strike a dovish tone later this afternoon.
“The latest data just confirms a weak economic picture and we can see that in the gold market. Gold is holding up very well despite record levels in equities,” he said. “A dovish Fed could create some caution in equity markets and that will be good for gold.”
However, Lusk warned that if the Fed maintains a hawkish tone, signaling a third rate hike this year and a reduction in its balance sheet, then gold could give up all the gains it has seen this morning.
“We really need a dovish Fed if gold is going to get over $1,300 an ounce,” he said. “Otherwise we are just going to be stuck in this range for a while, with dips being bought and rallies being sold.”
Phillip Streible, senior market analyst at RJO Futures, is also looking for higher gold prices as he expects a dovish Fed later in the day.
“I’m loving this rally right now but just wait. Gold’s jet engine is really going to take off if the Fed is more dovish,” he said. “However, if the Fed is still hawkish, then gold is done. We could see gold fall to $1,250 an ounce in very short order.”
Spurce: Reuters
