Gold Bottoms Ahead of the Fed

Daily Analysis - 14/06/2017

Precious Metals Prices Rebound from June Lows

After a steady downturn over the last few sessions, gold is gaining ground in early Wednesday trade, rebounding to around $1270 per troy ounce. Weakness in the US dollar ahead of a highly probable rate hike later in the session has seen prices reverse from around $1259 per troy ounce which coincides with lows reached earlier in the month.

Precious Metals Traders Locked in Fight to Control Market

Bullion traders are awaiting the conclusion of a two-day US Federal Open Market Committee (FOMC) meeting, with the Central Bank widely expected to hike rates. Although monetary policy tightening like rate hikes typically act as a headwind for precious metals prices, the last few decisions have seen the US dollar subsequently fall, potentially boosting prices of gold.

The yellow metal also received added momentum after US Attorney General Jeff Sessions faced questions from a Senate panel about his dealings with Russian officials and whether he deliberately misled Congress. The panel is investigating alleged Russian interference in the 2016 presidential polls. With gold displaying strength ahead of the Fed interest rate announcement, analysts reckon that a convincing break above strong resistance at $1275 per ounce could unlock further upside in prices.

Fed Meeting Draws Towards a Close

The US Federal Reserve is expected to hike its benchmark interest rate on Wednesday by a quarter of a percentage point. Chairwoman Janet Yellen will hold a post-meeting press briefing, which is likely to provide some insight into the Fed's $4.5 trillion balance sheet. The Central Bank hopes to start shrinking the balance sheet by the second half of this year, helping to also tighten monetary policy alongside interest rates.

However, recent weakness in US inflation data has investors worried that economic activity is slowing, which could dull the case for the Fed’s gradual monetary tightening. The consumer price index will be released ahead of the Fed decision, with the report forecast to show core inflation running at an annual pace of 1.90% in May. In the meantime, Dow September futures are currently trading just below the record high at 21299.

UK Inflation Nears 4-Year High

Further complicating the situation for the Bank of England which had indicated it was in no hurry to raise interest rates, UK inflation unexpectedly soared to its highest level in nearly four years during May. Reflecting the impact of a weaker Pound, prices of imported computer equipment and packaged foreign holidays rose further, lifting headline inflation to 2.90% and marking the fastest pace of price growth since 2013.

Apart from the headline figure topping economist forecasts of 2.70%, core inflation, which excludes volatile items like food and energy, also quickened in May. The narrower core consumer price index reading reached 2.60%, the highest level recorded since 2012. However, the pickup in prices is putting additional pressure on households considering wage growth has not kept pace with inflation. GBPUSD is moderately higher on Wednesday, with the pair last seen around 1.2785.

China Reports Steady Industrial Output Growth

Growth in Chinese factory output held steady during the month of May following a strong start to the year according to official data released earlier by the National Bureau of Statistics. Industrial output rose 6.50% from a year ago, matching the same pace of growth recorded back in April. The increase managed to top the consensus of 6.40% forecast by economists surveyed by The Wall Street Journal.

On a month-over-month basis, production edged 0.51% higher in May compared to the 0.56% rise reported the prior month. Separately, retail sales grew 10.70% in May from the year ago period, narrowly missing projections of a 10.80% increase. On a monthly basis, retail sales momentum slowed to 0.79% growth, evidence of the growing pressure on household spending as economic activity cools. USDCNH is largely unchanged in Wednesday morning trade in the aftermath of the results, with the pair trending around the 6.7900-mark.