Gold Price Forecast: Trump's Dollar Rhetoric Will Curb Downside Risks
Dollar and commodity price trends are likely to remain dominant in the week ahead. U.S. administration reservations over dollar strength are likely to curb fresh gold selling, although rallies are likely to be held below $1,250 per ounce.
Gold came under heavy selling pressure in the middle of the week with fresh 2018 lows below $1,220 per ounce. A strong dollar was a crucial factor in undermining gold, with further losses for commodity prices, especially copper, also contributing to the very negative tone. There was a corrective recovery to the $1,230 per ounce area late in the week as the dollar retreated from 2018 highs.
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The U.S. currency lost ground following comments on Thursday by President Trump that dollar strength was undermining U.S. competitiveness. He also expressed unease over Federal Reserve interest rate hikes and suggested that rate hikes would undo the good work done on the U.S. economy. On Friday, Trump also accused the EU and China of currency manipulation, which triggered another dollar leg lower.
Rhetoric from President Trump and the Treasury will, therefore, be watched closely in the week ahead. Sustained rhetoric in protest against dollar gains and Fed policy could trigger sharp U.S. losses and underpin gold. Any retreat by Trump and backing of a strong dollar would tend to underpin the dollar and lessen the potential for a gold rebound.
The U.S. economic outlook and monetary policy prospects will also be important. Comments from Fed officials will be watched closely given the conflicting pressures of trade uncertainty and evidence of higher inflation. Hawkish commentary would tend to support the dollar, while increased concerns surrounding trade would tend to underpin gold.
The durable goods orders data are due for release on Thursday, together with the latest figures on jobless claims, although the overall impact is likely to be limited. Most market attention will focus on Friday’s advance reading for second quarter GDP. There will be expectations of a strong figure, although there is likely to be an impact on Federal Reserve policy only if the data come in much weaker than expected.
The monetary policy outlook outside the U.S. will also be an important factor. The European Central Bank will announce its latest policy decision, and potential policy changes from the Bank of Japan and Bank of England will also be an important focus. If there is evidence of a more hawkish policy stance, there would be some potential gold support through gains in European currencies and the yen against the dollar.
Developments in Chinese markets will again be an important focus during the week, with a mixed impact on gold. Renewed losses in the yuan would tend to boost the dollar and undermine gold, although the impact would be likely to trigger weakness in equity markets, which could trigger defensive gold demand. At this stage, expectations of U.S. outperformance in global terms will tend to support the dollar, even if U.S.-China tensions intensify and remain a net headwind for gold.
The latest CFTC data recorded a significant decline in long, non-commercial gold positions to below 58,000 from above 81,000 the previous week, marking the lowest long position since early 2016. The decline in long positions will lessen the risk of further aggressive liquidation and should offer some gold protection during the week.
Liquidity will likely continue to fade during the U.S. and European summer holiday period, which could lead to erratic trading across all asset classes including precious metals.
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