All in a day! Gold sees sharp decline on Friday, but ends with weekly gains

The US Dollar Index surged 0.70% Friday to settle at 106.01 as the Index gained 1.70% on the week.

Geopolitical Watch

As per the US intelligence reports as reported by the Wall Street Journal, Iran might launch an attack on Israeli soil within the next 24 to 48 hours. Israel has been on high alert on the possibility of Iran launching a strike on Israeli targets to avenge the April 1 airstrike on an Iranian consulate building in the Syrian capital of Damascus.

President Joe Biden has promised "ironclad" support for Israel.

Israeli Foreign Minister Israel Katz vowed swift and strong retaliation if Iran attacks from its territory. The US administration said it is not ruling out launching joint retaliatory strikes with Israel in that scenario.

Heightened geopolitical tensions are supportive for the metal, though huge volatility is possible in reaction to concerning headlines.

Data round-up

The US yields and the dollar Index were boosted by the US CPI inflation data. Moreover, the much-awaited US CPI inflation report showed that inflation rose across the board. The core CPI rose 0.40% for the third straight month vs the forecast of 0.30%, whereas the headline CPI accelerated 3.50% on a y-o-y basis as the core was noted at 3.80%.

Both the readings exceeded their respective estimates of 3.4% and 3.70%. Housing and gasoline costs accounted for more than half of the increase in the overall CPI as shelter prices remained sticky as rent and owners' equivalent rent were both up 0.40%.

The Supercore services gauge, which excludes housing, recorded a 0.65% monthly gain. The three-month annualized rate has now risen to 4.60% from under 4% in February, thus denting June rate cut hopes. Markets now look for only two rate cuts this year.

The US PPI report was relatively tamer as US PPI final demand m-o-m (March) came in at 0.20% Vs the forecast of 0.30%, whereas PPI final demand y-o-y (March) was noted at 2.10% as against the estimate of 2.20%. PPI ex-food and energy m-o-m at 0.20% was in line with the forecast as y-o-y at 2.40% topped the estimate of 2.30%. FOMC minutes (March 20) showed that uncertainty over US inflation persists.

The European Central Bank, as expected, kept the benchmark rates unchanged, but gave the indication that it could cut interest rates in June, The ECB President Christine Lagarde signalled that growing confidence on cooling inflation would lead the central bank to cut rates at its next policy meeting on June 6. The ECB's stance is positive for the US Dollar Index.

Fedspeak slightly hawkish

New York Fed President John Williams and Richmond Fed President Thomas Barkin added that recent inflation data was disappointing and recent readings do not increase confidence that disinflation is spreading.

Boston Federal Reserve (Fed) President Susan Collins said on Friday that she sees 'in the range of two' rate cuts for 2024 as she expects inflationary pressure to wane this year, though timing of rate cuts is somewhat uncertain.

Chicago Fed’s Austan Goolsbee said that multiple inflation readings are higher than he wants and the Middle East instability is a wild card for the Fed in terms of oil prices and gas.

Kansas City Fed's Jeffrey Schmidt finds the current stance of US monetary policy to be appropriate on the persistently sticky inflation levels.

Data next week

Major US data next week include retail sales advance (March), housing starts (March), industrial production (March), Philadelphia Fed Business Outlook (April) and existing home sales. In the UK, the focus will be on the employment report (February), CPI (March), house price Index (February) and retail sales (March). Eurozone's major data on tap include Eurozone CPI (March final), industrial production (February) and Germany's PPI. China's GDP (1Q), industrial production (March), retail sales (March), and home prices (March) will also be in focus.

China factor

Gold has been getting strong buying support from China as the premium in Shanghai has surged.

China's PBoC bought gold for the 17th month in a row in March as gold held by the bank rose 0.20% to 72.74 million troy Ounces last month. Overall, global central banks added to their gold reserves in February for the ninth straight month. Central banks, especially PBoc, buying gold remain a key factor supporting the gold rally. A particular Chinese ETF that owns gold companies saw its premium over its underlying assets increased to more than 30% as of April 3 as the ETF's price gained over 40% in the past four sessions.

Outlook next week

Gold volatility is likely to continue amid opposite forces of yields and escalating geopolitical issues. Inflation hedge buying has emerged as a key theme. Contained geopolitical concerns will weigh on the metal. The yellow metal may test resistance at $2500, whereas major support is seen at $2300/$2250. Interim resistance is at $2450. Dip buying strategy will continue to be a preferred strategy for investors as gold will act as an insurance against extremely uncertain geopolitical scenarios.

(The author is Associate Vice President, Fundamental Currencies and Commodities, Sharekhan by BNP Paribas)

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