Gold to experience bargain buying in short-term on weak Indian Rupee; US inflation, retail sales data eyed

Posted on by

By Jigar Trivedi

MCX Gold October, after three back to back weekly declines, rose toward $1,720 an ounce, benefitting from a pullback in the dollar as investors digested Fed Chair Jerome Powell’s latest remarks about inflation. Powell said the Fed is “strongly committed” to fighting inflation, but markets took his comments in stride as traders have already priced in another supersized 75 basis point rate hike at this month’s policy meeting. The ECB also delivered a historic 75 basis point rate increase and signaled further tightening as it aims to get ahead of inflation despite heightened recession risks. Meanwhile, gold remains within 3% of its lowest levels in over two years, having also lost its shine as a hedge against inflation and economic uncertainty as rising interest rates dented bullion demand.

Another 75bp in an environment of strong growth and rising core price pressures

Federal Reserve Chair Jerome Powell’s comments on monetary policy are clearly supportive of a third consecutive 75bp interest rate hike on 21st September. There is no hint that he supports moderation, arguing that “we need to act now, forthrightly, strongly as we have been doing and we have to keep at it until the job is done”. There is also the usual mention of inflation expectations and the need to anchor them in order to ensure inflation doesn’t become ingrained.

The latest data certainly backs the case for 75bp with business surveys looking robust, the labour market continuing to create jobs in significant numbers, and next week’s inflation numbers set to show core CPI accelerating to 6.1% from 5.9%. Moreover, the third quarter is shaping up to be quite a strong one, fully reversing the declines seen in GDP in the first half of the year.

Inventories and net trade are swinging back and set to make decent positive contributions to headline growth. Meanwhile, consumer spending is being boosted by the lift in spending power from lower gasoline prices. High-frequency data over the Labor Day holiday show restaurant dining at record levels, while air passenger travel over the past weekend exceeded that of 2019 for the first time, so 3% growth looks to be on the cards.

Also read: MCX Gold outguns Comex on weak Indian Rupee, yellow metal may trade sideways; buy on dips for gains

Dollar eases after Powell & ECB remarks

The dollar index eased below 109 Friday and was set to snap a tree-week advance, as traders took some profits following a strong rally, while assessing Federal Reserve Chair Jerome Powell’s latest remarks about inflation. Powell said the Fed is “strongly committed” to fighting inflation and cautioned strongly against prematurely loosening policy. However, markets largely took his remarks in stride as traders have already priced in another supersized 75 basis point rate hike at this month’s policy meeting. His comments were also offset by the European Central Bank’s decision to raise its policy rate by a historic margin of 75 basis points on Thursday and signaled further tightening as it aims to get ahead of inflation despite heightened recession risks. Investors now look ahead of US CPI data for August to be released next week, which will be the last inflation report before this month’s policy meeting.

Comex, MCX gold outlook

Next week we expect the yellow metal to experience a short covering on the back of weak dollar index. The US will release CPI for August is expected to come on 13th September which will be keenly monitored. On 15th September, Thursday the US will release retail sales and industrial production for August. Investors will also have to monitor Fed monetary policy which is scheduled on 21st September. Traders are expecting the Fed to increase the rate by another 75 bps. Under this circumstance, we expect the dollar to retreat a bit since the market has discounted almost every aggression by the Fed. MCX Gold October may rebound to Rs 50,900 – 51,300 per 10 gram in the coming week. Comex gold is expected to recover to $1,740 an ounce in the week to come.

(Jigar Trivedi, Senior Analyst – Currency & Commodity, Reliance Securities. Views expressed are the author’s own.)