Today was dubbed “Super Thursday” and it didn’t disappoint as investors reacted to the publication of a much stronger US CPI than expected and a mixed-bag ECB policy meeting. Within half an hour of these events, there was a sense of calm with stock indices bouncing sharply off their lows along with gold and silver, while the dollar sold off against most currencies, with the EUR/USD going side-ways. European indices then came off their earlier highs, and so did the S&P 500 after hitting a new record high as investors took profit. But gold remained near its highs and it looked like it wanted to break further higher. Meanwhile crude oil plunged on a Bloomberg report that the US has lifted sanctions on Iranian oil officials. Although there was little detail on this, the market appears to be interpreting it as an indication of a broader easing in Iranian sanctions. It remains to be seen if the reports are confirmed, and oil was bouncing back off its lows at the time of writing.
Investors will be wondering whether the Fed will now at least entertain taper talks in light of a 5% jump in CPI, which was not only hotter than 4.7% expected and up sharply from 4.2% previously but was also the highest since 2008. But judging by the reaction of the bond markets – which sold off, causing their yields to rise – it looks like the market is positioning itself for a dovish Fed meeting next week. Most economist agree that inflation is going to start falling from here, in line with the Fed’s projections. The Fed certainly wouldn’t want to make a knee-jerk reaction to one or two bigger-than-expected CPI prints.
Meanwhile the EUR/USD managed to hold its own relatively well despite the sharp rise in US CPI and the ECB’s dovish stance, as it fell only modestly on the session. In part, this is due to the fact the ECB has upgraded its growth projections, while investors are expecting the Fed to dismiss the rise in US inflation because of transitory factors next week. More to the point, I think the euro is finding support because of flows (and expected flows) of funds into European stocks. There is more growth potential for EU stocks than US, and with the ECB keeping its QE taps wide open, we may well see an acceleration in that trend in the coming weeks and months. This should keep the euro supported.
If the EUR/USD does rise from here, it would only help to support gold because of the fact the precious metal is priced in the dollar. Gold actually found good support after the initial dip in reaction to the hotter inflation data than expected. It looks like gold investors agree with the Fed’s narrative that inflation will cool down in the months ahead, which means low rates for longer. In Europe, the ECB also dismissed talks of early tapering of its asset buying program, saying that PEPP will run at a significantly higher pace than in Q1. So, with more ECB money to flood the already saturated market, we will see increased flows into all sorts of assets, from stocks to gold and maybe even Bitcoin.
Gold in sweet spot
Today’s hammer candle on gold suggests gold remains in “buy-the-dip” mode ever since it bottomed out in March. With the trend line and 21-day exponential moving average holding as support, gold is in the sweet spot for trend followers. From here, a breakout above $1900 looks imminent. The next bullish objective would be the June high at $1916, followed by the 61.8% Fibonacci retracement level against the all-time high, at $1923. Thereafter, the next potential resistance area is seen between $1935 and $1940, where gold had previously dropped from.
Source: ThinkMarkets and TradingView.com
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
Learn and earn more today.
Visit our Education Centre