Gold strategy on July 3: Support at Rs 71,300; Resistance at Rs 72,000

Gold: Slightly lower as Powell remains cautious on rate cut possibilities

Performance
 

Spot gold rose slightly ahead of the US Fed Chair Powell’s speech at the European Central Bank forum on central banking in Sintra, Portugal. However, the attempt to rise was thwarted once again at the stiff resistance of $2340-$2350 zone as the US Fed Chief continued to maintain a cautious stance on the possibility of rate cuts by the Fed.
 

The yellow metal at the time of the MCX closing was changing hands at $2324, down nearly 0.30 per cent on the day, whereas the MCX August gold contract was at Rs 71,570 (LTP), down 0.12 per cent.

The US Dollar Index and the US yields
 

The ten-year yields reversed some of the sharp rise witnessed in the last two days; the yields recovered a bit in the wake of Powell’s take on rates and the US JOLTs job openings data coming in slightly better than expected. The Ten-year US yields were noted at 4.44 per cent, down 0.78 per cent on the day, at the time of the MCX closing. The US Dollar Index at 105.77 was a touch lower on the day.

Central Bankers at European Central Forum on Central Banking
 

The US Fed Chair Powell, at the ECB forum in Sintra, Portugal, said that the latest US economic data show that inflation is getting back on a downward path, but the Fed needs more evidence on inflation data before it can start cutting interest rates. He acknowledged that both the US economy and the labor market are strong, though unexpected loosening in the labor market would warrant a pivot in the Fed's monetary policy. He warned that the US fiscal deficit needs to be sorted out as it was on an unsustainable path.

The ECB President Lagarde was dovish in her take on the ECB's monetary policy as she said that the ECB does not need service inflation slow to its 2 per cent target for deciding on cutting benchmark rates as manufacturing inflation is already below 2%. It is to be noted that the Euro-zone’s services inflation held at 4.1 per cent as the headline inflation moderated to 2.50 per cent. Brazil's central bank Chief said that Brazil's central bank is not yet considering rate hikes. The Central Bank stopped the year-long easing cycle last week.

Data round up
 

The US ISM manufacturing and construction spending data released Monday were short of their respective forecasts as the manufacturing activity contracted for the third straight month.

The US JOLTs job openings (May), released Tuesday, came in at 8140K Vs the forecast of 7946K, the prior data was revised lower from 8059K to 7919K though.

Upcoming data: Data deluge warrants a caution
 

Today's major US data on tap are ADP employment change (June), trade balance (May), weekly job, S&P global US services and composite PMIs (June final), factory orders (May), durable goods orders (May final) and ISM services Index (June). FOMC minutes of June 12 meeting will also be released tonight.

Gold ETF holdings
 

In a somewhat positive development for the yellow metal, the total known global gold ETF holdings rose for the fifth day to 81.052MOz on July 1, the highest level since June 11.

Outlook
 

This week is quite crucial for gold as we have got key US data like ISM services, ADP, factory orders and monthly nonfarm payroll on tap. Apart from these data, market participants look forward to the FOMC minutes (June 12 FOMC meeting) for clues to the rate cuts.

French election is also on investors’ radar as the second round takes place on Sunday. Presently, the Euro is able to dodge the downside pressure on the far-right party National rally performing slightly below expectations; nonetheless, political concerns continue to linger, which may strengthen the US Dollar. The US yields are tending to move higher due to fiscal deficit concerns as Trump held an edge over Biden in the first round of the Presidential debate.

Going by the regional Fed surveys and CB confidence data, the US nonfarm payroll may throw an upside surprise. S&P Global US services data points to a healthy ISM services data. So, overall, gold is expected to trade with a slight bearish bias ahead of the key US data to be released today. 

The metal will fall further if the key US data turn out to be robust. 

Support for the metal is at $2315 (Rs 71,300)/$2300 (Rs 70,830)/$2277(Rs 70,100). Resistance is in the $2340-$2350 zone (Rs 72,000-Rs 72,400), followed by $2370 (Rs 73,000).     

(Praveen Singh is an associate vice president of fundamental currencies and commodities at Sharekhan by BNP Paribas. Views expressed are his own)