1. Dallas Fed business activity index falls
At 22:30 on Monday, April 25th, Beijing time, the Dallas Fed’s business activity index for April was released, recording -23.4, lower than the previous value and expectations, and a new low since July 2022. The data involves the expectations of 82 manufacturing companies in Texas in the United States for various aspects of the future. The decline in the activity index shows that companies’ perception of the overall environment has deteriorated.
2. Sudan’s Rapid Support Forces announce 72-hour ceasefire
On the evening of the 24th local time, the Sudan Rapid Support Forces announced a 72-hour ceasefire starting at midnight that night. Rapid Support Forces also stated that the purpose of the ceasefire is to open humanitarian access and facilitate people’s travel. So far, the Sudanese Armed Forces have not yet responded.
3. 10-year U.S. bond yields fall
Since the opening on Monday, the 10-year U.S. bond yield has been falling. Not only did it pull back all the gains last Friday, but it also closed below the daily low on Friday, closing at 3.496%, down 2.23%.
Gold soared above $2,045 in mid-April despite the Federal Reserve’s continued commitment to restrictive monetary policy and a record rate hike in this tightening cycle. Gold has benefited from the disconnect between the Fed’s hawkish policy rate guidance and the market’s pricing in a dovish rate path. Another reason for the rise in gold prices is the weakening of the U.S. dollar and the very strong demand for gold from investors and governments as they seek a safe-haven against inflationary disruptions, geopolitical pressures, and concerns about the U.S. dollar’s reserve currency status.
Although gold has given up some of its gains recently, and there is a high risk of further declines in the second quarter of 2023, we judge that gold may continue to rise to the $2,100 level in the second half of this year. Expected declines in nominal and real interest rates, concerns about the U.S. dollar, and strong physical gold buying by investors and governments are the key reasons driving our positive outlook. Furthermore, market conditions suggest that investors and central bank portfolios will continue to look to gold as a hedge this year amid concerns about financial system volatility, the need for liquidity, and loose monetary policy.
At this stage, the market is not particularly concerned about whether the Fed will raise interest rates by another 25 basis points. Traders are watching the Fed for signs of a shift to a dovish monetary policy stance, and believe the Fed and other major central banks will signal interest rate cuts as economic data weakens further in the second half of the year. Given the Fed’s credibility in the gold market, the market would need to see the Fed continue to raise interest rates, even if price pressures slump and unemployment rises sharply, before the market would have a negative impact on gold. Risks rise if the Fed is seen to turn dovish before inflation approaches its target. In fact, gold positioning levels suggest that the discretionary investor base is likely to be the catalyst for gold to move significantly above our year-end target, as they have plenty of room to add to their long exposure. However, in the face of still somewhat strong economic data, policy ambiguity also suggests that there may still be room for further corrections below $2,000 before gold sustains its move into the $2,100 mark.
Core inflation indicators, including CPI and PPI, indicate that US inflation is cooling. The US PCE data due on Friday will provide more information, the core PCE data is expected to fall from 4.6% in February to 4.5% in March. However, any unexpected rise in price pressures could push U.S. bond yields and the dollar higher, weighing on gold. On the other hand, lower-than-expected PCE data may push gold above the $2,000 mark. Technically, there is no question that the trend for gold is up. Even on the daily chart, gold’s recent move lower suggests a consolidation phase rather than a bearish phase. However, rather than the recent price action, it provides a case for caution at a larger scale, which means that a breakdown in gold may not be imminent, but the groundwork to the downside may now be being laid. So far, gold has struggled around its 2020 peak, which roughly coincides with the upper edge of an upward channel that began rising in late 2022. The top divergence of this month’s highs in gold at the weekly and daily levels indicates that the gold rally is losing momentum. In the short term, gold momentum continues to fall, so the focus shifts to the key support zone around 1935-1970. Any move below last week’s low of 1970 could risk a downside to 1935. On the upside, spot gold needs to break through 2072 decisively to make the outlook clearly turn bullish.
Gold futures maintained a comfortable buffer against reversals in key macroeconomic reports heading into mid-April Gold futures prices stagnated in the ensuing 2 weeks with mixed flow indicators. It’s worth noting that at the same time, Fed officials’ speeches have become increasingly hawkish, and U.S. economic data has been mixed, boosting real interest rates and stabilizing the dollar. Since then, gold prices have fallen further. Signs of a liquidation of funds are gradually emerging. Interestingly, the recent pullback in gold has not spilled over into more key cross-asset areas. As such, the bullish thesis about continued inflows into gold ETF holdings coupled with central bank gold purchases may temporarily lose credibility. In any case, the buffers against large-scale systemic disintegration are now weaker.
GAIN Capital Senior Technical Strategist Michael Boutros
Gold has already reacted to the upside resistance last month when we mentioned that if prices continue to move higher during this time and close above the upside channel resistance then gold would need to break $1858 to signal a resumption of the downtrend . Gold prices have continued to trade below resistance for more than a month, and the risk of a pullback still exists.
On the weekly chart, the first support is at the starting point of the decline in mid-April 2022 and the closing price in January this year, that is, the range of $1926-1928, and the next support is at $1883, the 38.2% retracement of the September-to-date rally. Gold needs to break through $2,004 to test $2,035 and $2,075 again, and if it reaches this level, a bigger rally is expected. Gold is testing upside resistance as momentum diverges, and while the overall outlook remains constructive, a close below its highest recent weekly close would signal the risk of a sharp pullback. We believe that a weekly gold close above 2035 would mark a continuation of the gold uptrend.