Signals from the Federal Reserve Chair that were less hawkish than market expectations have suppressed speculation of a rate hike this year, leading gold to extend its rebound and firmly re-establish itself above $4,000 per ounce.
On Thursday, spot gold rose 0.66% to $4,057 per ounce, ending a two-day decline. The strength in gold drove other precious metals higher as well, with silver at $59.74 per ounce, and platinum and palladium also advancing. Meanwhile, the Bloomberg Dollar Spot Index was largely flat.
Key Driver for Gold: Repricing of Rate Path
The Fed Chair stated at a European Central Bank forum in Portugal on Wednesday that inflation risks have diminished, while reiterating the Fed's commitment to achieving price stability and returning inflation to its 2% target. His remarks alleviated market concerns that the Fed might raise interest rates in response to rising energy prices and inflation indicators.
For gold, the repricing of the interest rate path is a core variable. Higher borrowing costs are typically unfavorable for non-yielding gold. The fact that the Fed Chair did not further reinforce expectations for rate hikes provided short-term support for the precious metals market.
Cooling Rate Hike Expectations Offer Gold a Respite
The immediate trigger for this gold rebound was that the Fed Chair's speech was not as hawkish as the market had feared. Previously, the war in Iran had pushed up energy prices and brought inflation indicators into focus, leading markets to speculate that the Fed might raise rates this year to counter inflationary pressures.
The Fed Chair's stance did not relax the anti-inflation position. He maintained the message from his first press conference as Fed Chair last month, namely that the central bank will fulfill its price stability commitment and bring inflation back to 2%. However, compared to prior market worries, he did not signal a more aggressive policy stance.
An analyst noted that this market sentiment "remains a net positive for gold." However, he also pointed out that the dollar remains at a relatively high level, and U.S. Treasury yields have recovered most of their earlier losses.
This indicates that investors have not fully confirmed the Fed Chair's policy leanings. The analyst stated that the market still "cannot clearly grasp the Fed Chair's outlook" because he has refused to provide forward guidance.
Mixed US Data, Non-Farm Payrolls to Provide Next Clue
The latest U.S. economic data presents mixed signals. Manufacturing activity expanded for a sixth consecutive month in June, but the pace of expansion slowed, indicating uneven economic momentum.
Meanwhile, robust private-sector employment growth has driven hiring performance over the past three months to its best range in over a year. The resilience of the labor market could influence market judgments regarding the Fed's subsequent policy path.
The non-farm payrolls data due on Thursday will provide investors with further clues. If employment remains strong, the market may reassess inflation and interest rate risks. If the data weakens, the interest rate support logic for gold may be reinforced.
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