Gold trading: Political uncertainty offsets optimism about a slowdown in inflation

During the Asian session on Monday (July 1), spot gold fluctuated slightly and is currently trading near $2323.46 per ounce. Gold prices surged higher on Friday and retreated, and while a key U.S. inflation report largely met expectations, boosting hopes that the Federal Reserve could cut interest rates by September, political uncertainty overshadowed the optimism, with U.S. Treasury yields surging to near a three-week high, sending gold prices back down to close near $2,326.28 an ounce.

Last week, the overall price of gold fluctuated little, with a weekly increase of about 0.2%; The monthly line fell by 0.05%, while the gold price rose by 4.19% in the second quarter, marking the third consecutive basis point gain.

"We continue to maintain a slow downward trend in inflation," said David Meger, director of alternative investments and trading at High Ridge Futures, "so we see yields continue to move lower and bonds higher, which supports the gold market to some extent." ”

On Friday, hopes rose that the Fed would cut rates in September and again in December, after the personal consumption expenditures index showed no month-on-month rise in May.

According to the CME FedWatch tool, traders are currently pricing in a 68% chance of a Fed rate cut in September, compared to 64% ahead of the inflation data.

Analysts noted that U.S. prices were flat in May from the previous month, with a modest increase in service costs offset by the biggest drop in commodity prices in six months, bringing the Fed closer to starting to cut interest rates later this year.

The Commerce Department's report released on Friday also showed a slight increase in consumer spending last month. Core prices are rising at the slowest pace in six months, fueling optimism that the Fed can design a much-anticipated "soft landing" for the economy, where inflation cools without triggering a recession and a sharp rise in unemployment.

"This is a very Fed-friendly report that should keep the September rate cut online while boosting investor confidence that moderate economic growth can be sustained even if interest rates remain higher for longer," said Scott Anderson, chief U.S. economist at BMO Capital Markets. ”

The Personal Consumption Expenditures (PCE) price index was flat last month, the first in six months, while the April increase was confirmed at 0.3%, the Commerce Department's Bureau of Economic Analysis said. Commodity prices fell 0.4%, the biggest drop since November.

In the 12 months to May, the PCE price index increased by 2.6% and 2.7% in April. Last month's inflation reading was in line with economists' expectations.

Inflation is coming back after surging in the first quarter as the Federal Reserve has cooled domestic demand by raising interest rates by 525 basis points since 2022, although inflation remains above the Fed's 2% target.

Economists are divided on whether the Fed will cut borrowing costs twice this year despite solid wage growth. Friday's U.S. jobs report for June is likely to shed more light on the outlook for monetary policy.

Excluding the volatile food and energy segments, the PCE price index edged up 0.1% last month, the smallest increase since November. This follows the core PCE price index rising 0.3% in April.

Previous reports showed that the so-called core PCE price index climbed 0.2% in April. Core annual inflation was 2.6% in May, the smallest increase since March 2021, and 2.8% in April. The annualized growth rate over the past three months was 2.7%, a slowdown from 3.5% in April.

The Federal Reserve tracks the PCE price gauge to achieve its inflation target. A month-on-month reading of 0.2% over time is necessary to bring inflation back to target.

PCE services inflation, which excludes energy and housing, also rose 0.1% last month after rising 0.3% in April. Policymakers are looking at this indicator to measure progress in reducing price pressures.

The report also showed that consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose by 0.2% last month, following a 0.1% increase in April. Spending on services increased by 0.3 percent, mainly in hospital care, housing and utilities, and air transport. Spending on services rose 0.4% in April.

The Atlanta Fed now expects GDP to grow by 2.2% in the second quarter. The economy grew by 1.4% in the first quarter.

Chris Low, chief economist at FHN Financial, said: "There was zero inflation in May, but there were no signs of weakness in demand due to slowing income growth, which the Fed believes is necessary to keep inflation low. ”

U.S. Treasury yields reversed earlier losses on Friday as uncertainty over the U.S. presidential election and French parliamentary elections offset a confidence boost from earlier data showing slowing U.S. inflation.

Concerns about the long-term trajectory of U.S. fiscal and monetary policy were in focus on Friday as U.S. President Joe Biden underperformed in a showdown with Republican rival Donald Trump during the first 2024 U.S. presidential debate last Thursday, adding to speculation that Trump could be elected president for a second time.

"This debate makes sense because the Trump camp is pro-growth, pro-equities, pro-tariff increases, which in the long run signals upward pressure on inflation," said Padhraic Garvey, head of research for the Americas at ING.

Garvey added that while short-term bonds are more directly affected by the prospect of rate cuts this year, longer-term bonds reflect ongoing concerns about rising U.S. Treasury issuance.

"This is a weakness in the future, where we get data that is ostensibly favorable for the talk of rate cuts, but long-term debt investors are starting to think more about the longer term," Garvey said.

However, Biden did not perform well in the election debate, but the top Democratic Party on Sunday ruled out the possibility of replacing Biden to represent the Democratic Party and called on party members to focus on the consequences of Trump's re-election as president.

After days of agonizing over Biden's poor performance in the debate with Trump, Democratic leaders have steadfastly rejected calls for the party to choose a younger candidate for the Nov. 5 election.

Meanwhile, French government bond yields rose on Friday as the first round of elections will be held on Sunday, with polls pointing to a possible victory for France's far-right parties.

Exit polls show that Le Pen's far-right party Rassemblement Narald (RN) won the first round in Sunday's French parliamentary elections, but the final result will depend on political deals ahead of the second round next week.

Exit polls by Ipsos, Ifop, OpinionWay and Elabe show that the National Alliance is expected to win about 34% of the vote, a huge setback for French President Emmanuel Macron.

The National Alliance has a wide lead over its left and centrist rivals, including Macron's centrist coalition Together, which is expected to receive 20.5%-23% of the vote. Exit polls also show that the hastily formed Left coalition New Popular Front (NFP) is expected to win about 29% of the vote.

John Velis, a macro strategist for the Americas at BNY, said that France's "populist politics... and the prospect of a possible lack of fiscal constraints" may have also contributed to the upside in Treasury yields, with investors not wanting to hold long positions in bonds before voting over the weekend.

Political concerns have pushed long-term yields higher, while the recovery in short-term yields may have been influenced by the Chicago Purchasing Managers' Index (PMI), which was much stronger than expected, shattering the narrative of a sharp slowdown, Velis said.

The yield on the 10-year Treasury note closed at 4.4% on Friday, about 11 basis points higher than on Thursday. The yield has fallen by 18 basis points since the beginning of June and has risen by 14 basis points since the start of the second quarter.

The rise in Treasury yields means an increase in the opportunity cost of holding gold.

On this trading day, investors need to pay attention to the performance of the final SPGR PMI data in June in Europe and the United States, and pay attention to the ISM manufacturing PMI data in the United States in June.

This week, we also need to pay attention to the US job openings in May, the ISM non-manufacturing PMI in the US in June, the change in the ADP employment in the US in June, the US non-farm payrolls report in June, the speeches of Fed Chairman Powell and other officials, and the news related to the geopolitical situation.

Last week, 12 Wall Street analysts participated in the Kitco News gold survey, and four experts said that they expect gold prices to rise in the coming week, accounting for 33%, while two analysts, or 17%, predict price falls. The remaining 6 experts, who make up exactly 50% of the total, do not want to believe the direction of gold in the coming week.

At the same time, Kitco received 178 votes in an online poll on how many retail investors are inclined to be bullish on gold, with 86 retail traders, accounting for 48%, expecting gold prices to rise in the coming week. Another 50 people, or 28%, expect gold prices to fall, while the remaining 42 respondents, or 24%, believe that prices will continue to move sideways in the coming week.

From a technical point of view, the moving average is intertwined, MACD intertwined, KDJ intertwined, the short-term trend is more variable, in view of the pressure on gold prices in the short-term moving average, before breaking through the 50-day moving average near the resistance of 2337.15, the market outlook is slightly biased to shock downward, pay attention to the support near the lower Bollinger band 2291.04, if it falls below the support, it may open the short-term downward channel. Conversely, if gold unexpectedly breaks through resistance near 2370 in the upper Bollinger Bands, it could start a new rally