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Gold was on a rollercoaster ride this month and ended lower, marking its first such decline in three months in April.
Price rose in the early half of the month but lost momentum close to $2,000/oz level and corrected sharply to near $1,870/oz level before moving back close to $19,00/oz level.
Gold has been directionless as support from geopolitical risks, inflation concerns and global growth worries is countered by Fed’s monetary tightening outlook which has pushed the US dollar and bond yields higher.
Market players are now gearing for the next big event which is the US Fed’s monetary policy decision in the first week of May.
Comments from the US Fed officials and higher inflationary pressure have fueled expectations that the central bank may raise interest aggressively to curb rising prices.
The general market expectations are that the Fed may raise the interest rate by 0.5% to 0.75-1%. Fed usually alters the lending rate by 0.25% but may consider a bigger hike to highlight its emphasis on getting inflation under control. The Fed may also lay down a plan for balance sheet reduction.
Given Fed’s rate hike has been factored in, the market focus will be more on future stance. The Fed is likely to maintain a hawkish stance as it intends to get the interest rate close to the normal rate estimated to be near 2.25-2.5%.
However, we need to see if the central bank may take a cautious stance given the challenges to the US and global economy.
There has been an ongoing debate if the US Fed may be able to raise interest rates without slowing the US economy significantly. Disappointing GDP data highlighted risks to the economy.
The US GDP slumped 1.4% in Q1 2022 as against expectations of a 1.1% growth amid challenges in the form of rise in virus cases, increasing price pressure, geopolitical uncertainty etc. IMF has also lowered global growth forecast for 2022 citing the Russia-Ukraine war.
The US Fed is expected to lead other central banks on monetary tightening and this has already pushed the US dollar index to 2002 highs.
The latest leg of the US dollar’s rise came in after Bank of Japan reiterated its support for accommodative stance despite rising inflation.
The Fed’s stance next week will determine whether the current rally in the US dollar may continue or not. With Fed’s hawkish stance largely factored in, we may not see much of a reaction to a 0.5% hike.
However, if the Fed acknowledges risks to the economy, it may be enough to trigger a small correction in the US dollar which could support commodities at large.
While all eyes are on Fed, there are other events as well in focus. The Bank of England is also scheduled to hold its monetary policy meeting next week and is set to raise interest rates for the fourth consecutive time and may also discuss outright bond sales.
The British Pound has been under pressure amid growth worries but may see some stability if the central bank maintains a tightening stance.
The other major event next week is the US non-farm payrolls data. While Fed has put all its focus on inflation currently, the health of labour market will also be pivotal in determining Fed’s monetary policy stance.
Early forecasts indicate that jobs growth was at a slower pace in April. A disappointing reading could also make the US dollar susceptible to profit taking.
Domestic Triggers
Back home, market players may also focus on physical market activity surrounding Akshay Tritiya on May 3. The day is considered auspicious to start new ventures and buy gold.
Gold has risen more than 7% since Akshay Tritiya last year and investor interest in the yellow metal remains strong.
With domestic gold prices well off the highs and increasing volatility in equities, it is likely that we may see good buying interest this year.
Disclaimer: The author is Associate Vice President – Commodity Research at Kotak Securities.