A combination of cautious commentary from Chair Jerome Powell about the economic outlook and rising cases of the coronavirus spooked markets. This also resulted in yields on longer-dated Treasuries pulling back.
In an environment where the US Dollar is rising and local bond yields are falling, gold can struggle to find direction in the near term. Down the road however, depressed borrowing costs, as central banks refrain from raising rates too soon, can work in XAU/USD’s favour. Still, the risk for the yellow metal remains a swift resurgence in volatility that boosts demand for liquidity, as with what happened during the Covid-19 outbreak.
*Majors-based USD index averages it against: EUR, JPY, GBP and AUD
Economic Event Risk – Second Coronavirus Wave, US Data, IMF
With that in mind, what are some risks in store ahead? As mentioned earlier, virus cases have been rising with hotspots seen in China’s capital, Beijing, Brazil, India and also the US. If governments reverse course on lockdown easing to protect their citizens, that would almost certainly prolong what is expected to be the world’s largest contraction in GDP since World War 2 – according to the World Bank.
If this induces sharp selling pressure in equities, raising the premium for liquidity, then gold may reverse course. Focusing on US data, Market PMI (services & manufacturing), durable goods orders, personal spending and University of Michigan Sentiment are due throughout the week. Data has been tending to materially outperform relative to economists’ expectations, opening the door to further upside surprises.
If stocks rise on a slew of rosy US data, the haven USD could fall as demand for safety weakens. But, this may also raise yields on longer-dated Treasuries. As such, these two forces working in tandem could leave the yellow metal struggling to find direction once more. Meanwhile, growth in the Fed’s balance continues to slow. In fact, it shrank over 1% last week.
This could mean that the extraordinary amount of liquidity deployed during the peak of the coronavirus outbreak is fading. For global equities, that could mean an increasingly challenging path to new highs. Or in other words, diminishing the scope for more USD weakness (gold negative). The International Monetary Fund is going to update 2020 growth prospects ahead and those may paint a still-dismal picture.
It seems that gold prices could continue to struggle in directionless trade. As such, this makes for another neutral call for the fundamental outlook.
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