With precious metals unable to gain defensive support, downside risks are liable to prevail in the short term, with the potential for fresh 2018 lows unless there is a significant shift toward a more dovish policy stance by Fed Chair Jerome Powell.
Gold edged higher early in the week, but there was resistance above $1,260 per ounce, and sellers gained fresh traction later in the week with a fresh retreat to near 2018 lows just below $1,240 per ounce. The dollar gained strong support against low-yielding assets including gold as U.S. yields proved attractive. The dollar trend will again have a crucial role in determining gold's direction over the week as a whole, with gold continuing to lose ground if the U.S. currency maintains a robust tone.
In this context, U.S. data and monetary policy expectations will also inevitably be a key influence. In terms of data, the retail sales data on Monday will grab most attention, with expectations of solid growth for the month. The industrial production release is due on Tuesday, with construction data on Wednesday. Survey evidence will be important, with the New York Empire manufacturing index on Monday and the Philly Fed release on Thursday. As well as headline figures, the components on inflation and capacity constraints will be watched very closely, especially with evidence of supply-side issues in the transport sector.
Data releases overall are likely to be of secondary importance to Congressional testimony from Powell. He will testify to the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday. If he maintains a hawkish policy stance and reiterates that the Fed will continue to push interest rates higher, the dollar should maintain a firm tone. Any suggestion of two further rate increases this year would boost the currency, A more downbeat tone and concerns that trade issues could have a more serious negative impact would undermine the dollar and boost gold, although the most likely outcome is that the Fed chair will remain circumspect on the outlook.
The extent of confidence in the European outlook will also be a significant factor. Evidence of a firmer tone in the Eurozone and U.K. economies, together with more hawkish rhetoric from the European Central Bank and the Bank of England, would make it more difficult for the dollar to make headway and would tend to underpin gold.
Risk conditions will also be important, with gold again liable to dip lower if risk aversion triggers dollar buying. If, however, sentiment shifts and trade issues undermine the U.S. currency, gold could see an important bottom. At this stage, expectations of U.S. outperformance in global terms will tend to support the dollar, even if U.S.-China tensions intensify.
The latest CFTC data recorded a small increase in net long, speculative gold positions, which does not suggest that there has been a capitulation on long holdings. In this context, there is little convincing evidence at this point that gold has reached an important low. Liquidity will tend to fade into the U.S. and European Summer holiday period, which could lead to erratic trading across all asset classes including precious metals.