Gold Remains Steady Near April High

Daily Analysis - 06/06/2017

Safe-Haven Demand Amid Weaker Data Lifts Precious Metals Prices


Gold prices are holding steady in early Tuesday trade, close to a six-week high hit during the previous trading session after softening US fundamentals raised additional concerns about the outlook for economic activity. Apart from the data, investors are seeking the safety of risk aversion assets ahead of UK general elections and a key European Central Bank meeting.

Fading US Data Provides Another Catalyst for Gold Rally

Bullion prices were supported on Monday after disappointing US employment data unveiled late last week, reduced the likelihood of additional actions to tighten interest rates quicker. Higher interest rates in the world’s largest economy are negative for gold as it increases the opportunities for savers looking for stable returns on investment after years of near-zero interest rates. Of late, gold has been trading with a very high degree of correlation with US bonds as inflation remains subdued and economic data continues to underwhelm.

With the tense geopolitical backdrop also impacting risk sentiment, gold is extending its rally, and was last seen just below $1290 per troy ounce. Strong resistance likely sits between $1295 and $1305 and in the event of a break above this level, prices could soar all the way to $1340 per ounce.


US Factory Orders Slip

For the first time in five months US factory orders fell, suggesting growth in the manufacturing sector remains uneven despite the moderate gains witnessed during the first half of the year. Orders for US-made goods fell -0.20% according to a report issued by the Commerce Department on Monday, following a higher revised 1.00% increase in orders during March. Besides matching the consensus estimate of a -0.20% drop in orders, factory orders increased 4.40% on an annualized basis.

Manufacturing accounts for close to 12.00% of US economic output, and is currently being boosted by a recovery in demand for oil drilling equipment. However, a slowdown in car sales is likely to hurt output in the coming months. Official data released Friday showed employment at motor vehicles manufacturers dropped by 1,500 jobs in May. Since reaching a fresh record on Friday, Dow futures have steadily retreated, trending around 21150 heading into the European session.


German Economy Gains Momentum

Data from IHS Markit’s final composite PMI showed a strengthening pace of German economic activity in May. The composite index, which tracks both the manufacturing and the services sector, rose to 57.4 from the 56.7 reported in April. The figure was well above the 50-mark that separates expansion from contraction and came in marginally above the preliminary estimate of 57.3.

Growth in German manufacturing accelerated at the fastest pace in just over six years, buoyed by strong demand from overseas clients. Services activity remained largely stable, with a final May PMI reading of 55.4 unchanged from the level reported a month earlier. For the first quarter, the German economy grew 0.60% versus the 0.40% recorded in the fourth quarter of 2016, helped by strong private consumption and increased state spending. DAX futures gapped lower in early trade to around 12840 after reaching a brand new high last week.


Australia’s Central Bank Keeps Rates on Hold

The Reserve Bank of Australia left its benchmark interest rate unchanged amidst a mixed scenario of stronger labour fundamentals and slower growth in real wages. The Central Bank kept the cash rate at a record low of 1.50% for the tenth consecutive month. The decision was unanimously forecast by economists. Five of those 23 surveyed by Bloomberg are now projecting a cut within the next year, as home prices begin to cool, especially in the overheated eastern markets.

RBA Governor Philip Lowe and his board further pointed to tepid growth for the first three months of the year. Australia is scheduled to release GDP figures on Wednesday, with a majority of analysts anticipating weaker numbers following the disappointing current account data. After slipping earlier, AUDUSD is currently hovering around 0.7485, just below a key resistance zone.


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