Gold: Global Carry Trade Unwind, US Dollar Weakness May Offer Bulls Fresh Momentum
2024.08.05 07:00
- Market turbulence caused currency gains and declines in bond yields and stocks, affecting gold prices.
- Disappointing jobs data shifted expectations to significant Fed rate cuts, increasing market volatility.
- Gold’s bullish trend persists with support at $2410 and resistance at $2450 and $2483.
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The primary focus for markets now has turned to the unwinding of carry trades, which led to significant gains in currencies like the and to a lesser degree the . Meanwhile, government bond yields slumped, while stock indices and US futures fell as investors fretted over a US recession.
On the one hand, these developments should be positive news for given that it tends to move inversely with yields, while its recent correlation with stock indices argues for some caution.
Either way, gold may join global FX in moving positively against the once the equity markets stabilize.
NFP couldn’t underpin gold as focus turns to ISM services PMI
Friday’s disappointing jobs report saw bond yields dip sharply, but this did not bolster gold prices as one would have expected. Despite climbing to a weekly high, gold then reversed and dropped and has since remained under mild pressure – albeit holding its own above key level.
This anomaly was probably due to the continued sell-off in stocks, which forced the liquidation of leveraged long trades, negatively impacting gold. However, the downside appears limited, and new all-time highs are still within reach, given the unfavorable macro environment for the US dollar.
Friday’s disappointing data rounded off a week characterized by weaker US economic figures, a slightly less dovish Federal Reserve than expected, and a surprisingly hawkish Bank of Japan. With the PMI set for release later on Monday, further volatility should be anticipated across asset classes.
The weak jobs report seems to have had a major impact on US interest rates. Short-term US yields plummeted as market expectations changed drastically, with a significant probability of the Fed cutting rates sharply this year. The market is now forecasting roughly 120 basis points of rate cuts by the end of the year, driven by concerns about a potential recession.
The outlook for Fed policy has shifted from expecting a gradual adjustment to anticipating a 50-basis point cut in September, which is double the previous expectation of 25 basis points.
ISM services PMI key focus for investors
This week’s macro highlight is probably the report from the US, slated for release later on today. This follows last week’s poor ISM manufacturing PMI, which spurred recession concerns and declines in stocks and bond yields.
The services PMI is expected to rebound to 51.3, indicating expansion, after a surprising drop to 48.8 last month. The previous contraction was driven by a slump in business activity and new orders, contracting for the first time since May 2020.
Given the Federal Reserve’s increasing focus on employment, attention will be on the employment component of the ISM services PMI, as well as the headline figure. This report could significantly influence market sentiment and gold prices in the near term.
Gold technical analysis and trade ideas
The trend is quite clearly bullish on gold. Until such a time we see a breakdown in the trend of higher highs and higher lows, I will give the bulls the benefit of the doubt.
A few short-term support levels to watch on gold include $2410/15 area, previously support and resistance, following by the bullish trend line coming around $2400 area and then $2360.
Short-term resistance is seen at $2450, followed by the all-time high that was hit in July at $2483.
Overall, gold’s outlook remains positive despite being unable to rally to a new all-time high on Friday. Traders should closely monitor the ongoing unwinding of carry trades as well as economic indicators this week, including Fed speeches, as these will play crucial roles in shaping gold prices.
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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.
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