Increased confidence in the European outlook would increase the risks of a limited U.S. dollar correction and limit gold selling, but it would also tend to reduce structural gold demand. Precious metals will again attract demand at times due to global trade fears. Overall, a limited further net retreat remains the most likely short-term outcome amid choppy conditions.
Gold continued to weaken during the week amid choppy trading conditions. Although there was some defensive support when U.S.-China trade tensions intensified, the impact was negated by renewed dollar strength as the U.S. currency index posted fresh 11-month highs. Gold declined to 2018 lows just above $1,260 per ounce before a recovery to $1,270 as the dollar corrected weaker.
The latest U.S. consumer confidence data are due on Tuesday, with durable goods data on Tuesday and the final first-quarter GDP release on Thursday. Survey evidence will be watched closely, with a particular focus on pricing trends given the potential impact on interest rate expectations. The core PCE prices data will be released on Friday, and a higher-than-expected release would strengthen expectations of higher inflation. Overall, however, data releases and Fed rhetoric are unlikely to have a major impact on the gold market.
Dollar developments overall will be a crucial element during the week. The U.S. currency has gained strong support from expectations that the U.S. economy will outperform other G7 economies. In this context, expectations of policy divergence have also provided strong U.S. support, with the Federal Reserve expected to keep raising interest rates while other central banks take a very dovish stance.
There has been a slight shift in sentiment following the more hawkish-than-expected Bank of England policy statement and evidence of firmer Eurozone data. Less bearish expectations surrounding Europe would tend to curb dollar demand and slow gold selling, although increased confidence in the global outlook would still be a net negative factor for precious metals.
Trends in commodity currencies will need to be watched closely, with gold much more likely to demonstrate resilience if commodity currencies can continue to correct stronger. In addition, emerging market trends will continue to be important amid underlying volatility and unease surrounding tighter financial conditions. Further stresses in countries such as Brazil and South Africa would tend to underpin gold, especially if tensions spread, while an easing of tensions would limit potential demand.
Global trade developments will also be important given persistent concerns surrounding the threat of a U.S.-China trade war. Aggressive rhetoric, retaliation and a further lurch toward protectionism would increase fears over global economic damage and tend to underpin gold demand. Wider developments in the Chinese economy will also be an important influence after evidence of increased vulnerability. Evidence of financial stresses would trigger a fresh spike in risk aversion and boost defensive gold demand.