Gold prices faced downward pressure through the week, encouraging US economic data, with the focus on Consumer Price Index (CPI) developments in the coming week. Gold experienced first weekly decline in 3 weeks. The US 10-year treasury note yield climbed towards 4.3% supported with a surprising drop in US weekly jobless claims to the lowest level since February. Additionally, the ISM Services PMI for August 2023 surged to 54.5, indicating the strongest growth in services sector on six months.
The Federal Reserve expressed concerns that robust economic activity can lead to continued inflationary pressures, necessitating further tightening. The extension of the OPEC+ output cut led in a rise in oil prices which contributed to inflationary risks.
The US dollar index has reached a six-month high of 105 levels, driven with dampened risk sentiment with disappointing services PMI reports from China and the Eurozone. In August 2023, the Eurozone Composite PMI was revised lower to 46.7, marking the most significant contraction in private sector activity since November 2020. China’s Caixin Services PMI decreased from 54.1 in July to 51.8 in August, suggesting a waning economic recovery as well as undermining early optimism linked with government stimulus measures. China’s trade data for August surpassed forecasts, with exports and imports declined, reflecting the domestic and overseas demand.
Within the Federal Reserve, there is a division concerning whether implementing one more interest rate hike, although most members agree rates should be elevated for an extended period. Cracks in the consensus are increasingly apparent as economic cycle approaches a turning point. Former Fed Bank of St. Louis President James Bullard advocated to pencil on one additional hike this year, while Federal Reserve Cleveland President Loretta Mester hinted at the need for further rate increases, although without specifying the time.
In terms of investment demand, physically backed gold exchange-traded funds (ETFs) experienced net outflows for the third consecutive month, losing US$2.5 billion (46 tonnes) in August. During the Jackson Hole symposium, Fed Chair Powell reinforced the notion of ‘higher for longer rates,’ reducing gold’s appeal as the opportunity cost of holding the precious metal increased. US benchmark treasury yields have risen for five consecutive months, hovering near an 11-month high, supported by a resilient US economy and growing expectations of a soft landing. Meanwhile, central banks collectively reported healthy net purchases of 55 tonnes in July, according to the World Gold Council. China and Poland added around 23 tonnes each, while Turkey added 17 tonnes.
The upcoming week is expected to bring a focus on US inflation figures, retail sales data, the ECB monetary policy meeting, and a range of Chinese economic data releases. The ECB is expected to announce its final rate hike next week. Bloomberg forecasts headline CPI will marginally increase to 3.6% in August, while core inflation is expected to ease to 4.3%. While worries about increasing inflation could persist and bolster the US dollar, potentially leading to downward pressure on gold prices in the upcoming week, which is worth noting that there’s a possibility of some short covering occurring in anticipation of the US CPI release.
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