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Cleveland Fed President Loretta Mester, in an interview with WSJ, expressed a cautious stance on interest rate hikes, stating, "I am not eager to consider interest rate hikes." Mester emphasized that Fed is in a "really good place" to study the economy before deciding on the next steps for interest rates.

Mester highlighted that it's too early to determine whether the disinflation has stalled or if inflation is set to reverse. She noted that there are clear indications that the real side of the economy is "moderating", which is contributing to a better balance within the economy.

• Gold pulls back after hitting record high near $2430
• Retreat remains short-lived as geopolitical risks escalate
• But demand from China seems to be slowing
• Yet, the chances for fresh advances remain elevated

Geopolitics among the main drivers

After hitting a record high at around $2,430 on April 12, gold entered a corrective phase due to the easing of geopolitical tensions at the time allowing investors to continue offloading safe-haven positions.

However, the retreat remained short-lived, with the precious metal rebounding again on new safe-have inflows as Israel ordered Palestinians to evacuate areas of Gaza’s Rafah, adding to fears of a ground attack in the region.

Even the latest hawkish remarks by several Fed policymakers that prompted market participants to price in only 41bps worth of rate reductions by the end of the year were not enough to deter the precious metal’s recovery. After all, it has been defying the market’s massive repricing since the beginning of the year, when investors were expecting around 160bps cuts.

Chinese demand for gold slows down

What has been driving gold was thoroughly discussed in a previous special report, where it was concluded that apart from geopolitics, one other main force behind the metal’s surge to record highs was China.

The People’s Bank of China has been compiling huge amounts of gold in an attempt to weaken its dollar dependency. However, although net demand from central banks during the first quarter of 2024 was the strongest first quarter of any year, the PBoC’s purchases have further slowed, with Turkey ramping up its pace notably, and buying the most in absolute terms as well.

On top of that, retail demand in China may have also slowed lately, and this is evident by comparing the month-on-month change of the Shanghai gold benchmark price to international gold prices. This comparison suggests that the latest pullback was deeper in China’s benchmark than in international prices, and that the following rebound was healthier in international prices.

But slowdown may be temporary

So, has Chinese demand for the precious metal started fading out or is this just a temporary easing before another boost?

From the central bank perspective, the PBoC may reaccelerate its purchases getting closer to the US elections in November, as a Trump victory carries the risk of worsening US-China relations. Thus, Chinese policymakers may continue eliminating their dollar dependency in order to minimize the economic damage in case the US decides to weaponize its own currency.

As far as retail demand is concerned, with the Chinese stock market being subdued and cryptos banned there, the precious metal may have been one of the few vehicles that local investors could profit from.

Nonetheless, the latest CPI data showed that China’s consumer prices rose for a third straight month in April, which combined with rising imports, suggests improving domestic demand. However, the official PMIs for the month revealed softening activity, while the wounds of the property sector are not showing signs of healing, which means that the recovery momentum may easily fade again.

With all that in mind, should incoming Chinese data increase confidence that the recovery is likely to continue, retail investors may decide to divert some flows from gold to the stock market. The opposite may be true in case the economic recovery proves to be short lived.

Anyhow, even if Chinese retailers decide to reduce their exposure to the yellow metal, the result could be just another corrective retreat rather than a full-scale bearish reversal as the other variables in the equation could remain supportive. As already mentioned, geopolitical tensions seem to be flaring up again, while China’s central bank may decide to reaccelerate its gold purchases in the months to come.

What about US interest rates?

As for the future direction of US interest rates, the fact that most Fed policymakers are seeing the case of a rate-hike resumption as very unlikely may be keeping gold traders at ease. Delayed rate cuts may not be much of a concern for gold investors as their horizons are likely longer than those of forex traders. Thus, the fact that the Fed is still seen reducing borrowing costs at some point later this year may be more than enough as it keeps the upside potential in Treasury yields limited.

Technical picture remains positive

The technical outlook is also suggesting that the latest uptrend in gold is not over yet. The price entered a recovery mode lately after hitting support near the $2,280 zone, remaining above the 50-day exponential moving average (EMA), and well above the uptrend line drawn from the low of October 6, which currently coincides with the 200-day EMA.

If investors remain willing to buy the precious metal at current levels, they may put the record high of $2,430 on their radars again. A break higher would confirm a higher high and perhaps pave the way towards the psychological zone of $2,500.

On the downside, a dip below the $2,280 area and the 50-day EMA could signal the beginning of a larger bearish correction. But given that the price would still be trading above the aforementioned uptrend line, any speculation about a long-lasting trend reversal may be premature.

Hello traders. In this blog post, we will look at how GBPCAD advances bullish sequence from late 2023 after it bounced from an equal leg area. As you know, we analyze and trade 78 instruments with members at ElliottWave-Forecast. These 78 instruments are grouped into three categories. This currency pair is in group 2 along with 25 other instruments spread across four asset classes, including Cryptocurrencies, Forex, Indices, and Commodities.

How GBPCAD advances bullish sequence – 05.09.2024 Update

GBPCAD, as our members know, has been in a bullish diagonal sequence since October 2023. This diagonal was expected to complete the primary degree wave ((1)). Wave (4) of ((1)) was completed on 22nd April 2024 at 1.6888. Following wave (4), wave (5) of ((1)) quickly rallied and completed its first leg, wave W. Afterwards, wave X emerged from the 30th April high to form a double zigzag structure. We shared the chart above with members on 9th May 2024, identifying the 1.7080-to-1.7000 equal legs area is crucial for wave X completion.

How GBPCAD advances bullish sequence – 05.14.2024 Update

Just as expected, wave X of (5) found support at the equal leg of 1.7080 and bounced quickly. The chart above was part of the 14th May New York update we shared with members. The chart shows the price separating from the equal leg with an impulse for (i). Going forward, we expect the price to breach the top of wave (i) thus paving the way for wave (iii) of ((a)) of Y. This would give the pair a chance to break wave W high and get wave Y properly underway.

However, we always take note of the alternatives. If the current dip for (ii) extends lower below X, then we will have to determine a new extreme for wave X where buyers will look for new LONG positions in anticipation of Y. Ideally, we would like to see the wave W high breached and then look for LONG positions after the next pullback completes 3, 7, or 11 swings in the extreme area.

Key themes: Jerome Powell shared the limelight with the US producer price inflation report overnight.

An upside headline surprise in producer price inflation was tempered by a sizeable downside revision to the previous month and more constructive underlying detail.

Overall the data was supportive of further disinflation and did little to move the dial on expectations for further inflation progress in tonight’s US consumer price inflation report.

Jerome Powell struck a familiar tone, arguing for patience after the downward inflation trajectory hit a snag over the start of 2024. Powell again reiterated the Fed’s view that rates are in restrictive territory.

US equities gained pulling up just shy of record highs, treasury yields were lower across the curve and the US dollar slipped.

Share markets: US equities moved higher overnight buoyed by a rally in tech stocks. The S&P 500 rose 0.5% to close just 0.3% shy of its record high. The tech heavy NASDAQ was up 0.8%.

The ASX 200 fell 0.3% yesterday. However, futures gained almost half a percent overnight pointing to a solid open this morning.

It was a mixed showing in Europe. The German DAX sliped 0.1%, the Euro Stoxx 50 was flat and London’s FTSE 100 rose 0.2%.

Interest rates: US treasury yields initially spiked in response to stronger than expected headline US producer price inflation data. However, a more benign underlying picture saw yields quickly unwind and move lower throughout the session. Comments from Jerome Powell reiterating the need for patience supported the move lower in yields.

The US 2-year yield jumped to a high of 4.89% before slipping to 4.81%, 5 basis points below yesterday’s close. The 10-year yield also finished the session 5 basis points lower at 4.44% after briefly touching a high of 4.53%.

Aussie bond futures followed the lead from the US. The 3-year futures yield rose 2 basis points to 3.97%, while the 10-year yield rose 1 basis points to 4.35%.

Foreign exchange: The US dollar slipped against every G-10 major save the Japanese Yen. The DXY index fell from a high of 105.46 to a low of 104.96 and is currently trading marginally back above the 105 handle.

The Aussie dollar rose, but remained comfortably within the last week’s trading range. The AUD/USD traded from a low of 0.6580 to a high of 0.6628 and is currently trading slightly below that level.

The euro (+0.3%) and the British Pound (+0.3%) both gained. The USD/JPY consolidated gains above 156 despite the 10-year Japanese government bond yield hitting its highest level since November last year and in doing so equalling the highest level since early 2012.

Commodities: Commodity prices were broadly lower overnight. West Texas Intermediate (WTI) oil futures fell 1.4% to US$78.02 per barrel despite data showing US crude inventories fell by 3.1 million barrels last week and Russia’s oil exports fell to an eight-week low over the week ending 12 May.

Copper slipped 0.8% but held comfortably above US$10k per metric tonne, while iron ore dropped 1.9% to US$114.15 per metric tonne. Gold bucked the trend, rising 0.9% to US$2358.12 per ounce.

Australia: The Government is walking a fine line on spending in the Budget to keep the economy on a narrow path. The cost-of-living squeeze is real, but the Government does not want to stoke inflation further. Many measures have been designed to lower reported inflation, including expanded energy bill relief, greater rent assistance and cheaper medicines. The government’s forecast of headline inflation reaching 2.75% by the end of 2024-25 is a little below our own forecast, but it is entirely plausible. These changes should not materially shift the timing of RBA decisions on rate cuts.

But new spending – including on housing, infrastructure and the care sector – adds additional stimulus. Most of the net new spending (close to $20bn) is front-loaded into 2024-25 and 2025-26.

After recording a second consecutive surplus in 2023-24, the budget swings into a bigger deficit than we expected in 2024-25. Some of this stems from the new spending and slower nominal growth. As in past years, though, conservative assumptions about commodity prices and bond yields also contribute. One can’t rule out another positive surprise in the 2024-25 final outcome in 12 months’ time. And at 1% of GDP, the projected deficit for 2024-25 is notably smaller than those in many peer economies.

Euro Zone: Governing Council member Klaas Knot said the next policy meeting may be the right time to start lowering borrowing costs, reinforcing expectations that monetary policy easing could be imminent. The Dutch central bank chief said “we will have new projections, and I’m confident again that if they confirm the picture as I just sketched it, that June will be a good opportunity to make a first move in removing restriction”. Belgian central bank governor, Pierre Wunsch caveated that the ECB shouldn’t rush into further interest rates cuts after a like first move in June flagging strong wage pressures as a reason to “proceed gradually and not too quickly”.

ZEW economic growth expectations continued to grind higher in May rising to 47.0 from 43.9 in April. This was the strongest reading since February 2022 as optimism continues to improve alongside more constructive economic growth indicators.

German inflation was finalised unchanged at 0.5% in April. Annual inflation was also steady at 2.2%.

New Zealand: Retail card spending fell 0.4% in April, the fourth fall in the last five months. Sluggish card spending activity suggests weakness is extending into the June quarter.

Net overseas migration slowed to 4.9k in March while February’s 7.6k gain was revised down to 6.3k. Annual migration slowed for a fourth straight month to 111.5k.

United Kingdom: The ILO unemployment rate edged up to 4.3% in March from 4.2% in February as widely expected. The unemployment rate has ticked up over first three months of 2024 as employment growth slows and the jobs market continues to cool.

However, annual growth in average weekly earnings topped consensus, holding unchanged to 5.7% compared to expectations for a more mild 5.5% gain. Sticky wages growth in the face of a cooling labour market may complicate the rate cut picture for the Bank of England (BoE). Importantly, the recent wage figures came comfortably within the BoE’s own forecasts which will help temper any concerns.

United States: Jerome Powell said “the first quarter in the United States was notable for its lack of further progress on inflation” but reiterated that policy was restrictive on many measures and that “we’ll need to be patient and let restrictive policy do its work”. The remarks did little to deviate from the higher for longer rhetoric reinforcing expectations of a long pause in interest rates.

An upside surprise to headline producer price inflation in April was tempered by a sizeable March revision and less intimidating underlying detail. The producer price index (PPI), which measures cost pressures faced by businesses and is an important leading indicator for consumer price inflation, rose 0.5% in April surpassing expectations for a 0.3% increase. However, the sharp increase was flattered by a downward revision to March’s reading from 0.2% to -0.1%. Additionally, the survey detail revealed that key components feeding into the Fed’s preferred inflation measure, the core personal consumption expenditure deflator, were more constructive. In annual terms the PPI rose to 2.2% from 1.8% previously and has been tracking moderately higher over the start of 2024.

• EURCHF rising inside impulse wave 3
• Likely to reach resistance level 0.9835

EURCHF currency pair continues to rise inside the impulse wave 3, which started earlier from the support trendline of the daily Triangle from April.

The active impulse wave 3 belongs to the higher order impulse wave (3) from the middle of April.

Given the strong daily uptrend, EURCHF currency pair can be expected to rise further toward the next resistance level 0.9835, which stopped the previous waves (1), B and 1.

Fed Chair Jerome Powell, speaking at an event in Amsterdam, characterized the recent US economic data as presenting a "good picture." He noted that the labor market is showing signs of "gradual cooling" and moving toward "better balance." However, he pointed out that disinflation in the first quarter was marked by a "lack of further progress."

Addressing today's US PPI data, Powell described it as more "mixed" than "hot," explaining that while the April figures were higher than expected, previous data had been revised lower.

Powell reiterated that he does not anticipate the central bank's next move on interest rates to be an increase.

ECB Governing Council member Pierre Wunsch has indicated that the first 50bps rate cut in the upcoming easing cycle is "close to a no brainer". However, he emphasized that any policy easing should proceed "gradually and not too quickly."

Wunsch advised against committing to a second rate cut in July after the first in June, explaining that consecutive cuts could signal a series of rate reductions, which might heighten market expectations prematurely. He stressed the need for caution due to the uncertainty surrounding the future path of interest rates.

Wunsch also commented on the potential impact of Fed's actions on ECB's policy decisions. He noted that a delay in rate cuts by Fed could slow the pace of ECB rate reductions. However, he reassured that this would not derail the Eurozone's disinflation.

"Higher U.S. interest rates could lead to a strong dollar and thus to imported inflation, i.e., higher prices here," Wunsch explained. "That might lead to a slower pace at which we cut rates. However, it is unlikely that it will take us off the inflation path towards 2%."

Crude oil has been under pressure over the past four weeks but has been gaining support on the decline to $77 per barrel WTI and $82 per barrel Brent since the beginning of the month. The price has been consolidating in roughly the same area for over a month since the second half of February. Then, there was a prolonged pause in growth to overcome the 200-day average. Now, it could be a pause before a further plunge.

The bears showed their strength a fortnight ago, causing a 4.5% drop in two days and pushing the price immediately below the 50- and 200-day moving averages, which are filters of the medium- and long-term trend, respectively. From this perspective, the subsequent consolidation last week and at the start of this week may be an attempt to remove excessive short-term oversold and build strength and liquidity for a new attack.

Also, the latest consolidation area roughly coincides with the support of the ascending corridor that has been in force for the past five months. A new downside momentum would be a formal prologue to break the uptrend with a potential downside target at $75 for WTI and around $79 for Brent. Near these levels lies the 200-week moving average, a dip below which has intensified discussions on production cuts, resulting in an upward reversal of prices. Impulsive dips below did not exceed 3% for over a year.

The US government’s stance has also changed over the past two years, and we are seeing buying to replenish reserves in downturns, as was the case late last year and early this year.

Of course, OPEC support and purchases into US reserves do not provide infinite support, and the market easily passed it in 2020, 2014 and 2008, and briefly in 2018 if we take the most recent history. Thus, oil’s failure under $72.5 for WTI and $76.3 for Brent could signal that the sellers have the upper hand this time. If this is a repeat of the almost free-fall that we saw in 2020, 2014 or 2008, the price could well plunge back into the $30 area. Near that price, most production becomes unprofitable. However, this has only happened because of a marked dysfunction in the financial markets. So far, there are no signs of this, although the situation may change quickly.

Still, the main scenario, we believe, is that oil returns to growth due to the ease with which OPEC+ can remove 0.5% of global production from the market – enough to reverse the trend. Also, we should not overlook the rise in commodity prices in recent weeks as China has increased steps to stimulate growth.

Markets

Both interest rate markets and the dollar held a wait-and-see mode this morning with EMU bonds slightly underperforming the US Treasuries. German ZEW investors sentiment again improved more than expected (expectations index from 42.9 to 47.1, the 10th consecutive improvement). This is not the most important input for the ECB, but it maybe marginally supported EMU yields. The focus of global markets however was on the first set US price data to be published this afternoon with the April producer prices. At 0.5% M/M for the headline figure and the measure excluding food and energy, monthly data were higher than expected, but the rise in the Y/Y-measure was slowed by a downward revision of the March data. Food price inflation was negative (-0.7% M/M), but services inflation (0.6% M/M) reaccelerated. US yields after the release briefly tried to reverse a small intraday decline, but soon relapsed, with markets looking forward to tomorrow’s CPI release. US yields currently decline 3-4 bps across the curve. German Bunds underperform with yields adding between 1-2 bps. ECB’s Wunsch in an interview with Handelsblatt was quoted that wage pressure persists, keeping services inflation high. In this context he wants the ECB to proceed gradually with rate cuts with no room for a back-to-back rate cut in July after a first step June. Equities show no clear trend. The rebound in the EuroStoxx 50 slows (-0.1% today) as the April top is again within reach. US indices also open marginally higher. Oil still struggles after recent losses (Brent $83 b/p).

The modest reaction of US interest rate markets to the PPI release is keeping the dollar in the defensive. The DXY trade-weighted index returned to the 105 area. EUR/USD tries a second consecutive attempt to regain the 1.0811 ST top. A gradual, but protracted further rise in Japanese long term yields amid speculation on some further BOJ policy normalization (lower amount of bond buying) isn’t enough to prevent further yen losses (USD/JPY 156.4). Sterling this morning initially didn’t know how to react to mixed UK labour market data (wage growth ex bonus still 6.0% Y/Y, but a further decline in April payrolls of 85k). Later in the session, BoE Chief economist Pill sounded rather soft as he indicated that the BoE can cut rates while staying restrictive as the BOE is making good progress in bringing inflation back to target. UK yields today decline 2-3 bps across the curve. EUR/GBP reversed tentative early weakness and again trades just north of the 0.86 big figure.

News & Views

After hitting the lowest since 2012 in March, US small business optimism unexpectedly recovered from 88.5 to 89.7 in April. It’s the first increase of the year but the headline figure remains well below the 50-yr average of 98, the National Federation of Independent Business said. 22% reported that cost pressures, including historically high levels of employee compensation, was the single most important problem in their business. Key findings of the April report include that 26% plan price hikes in April, down seven points to the lowest reading since April last year. A slightly bigger percentage of firms reported that they plan to hire in the next three months, though the subindex remains near its lowest since 2016 (excluding the pandemic period in 2020). 40% reported job openings they could not fill in the current period, up three points from March, which was then the lowest reading since January 2021. The net percent of owners who expect real sales to be higher rose six points from March to a net negative 12%. General uncertainty crept higher to 78.0 in April.

The Hungarian forint extends its recent strong performance today. EUR/HUF hits a three-month low around 386.4 in the wake of MNB Virag speaking. The deputy governor stressed the need for further efforts to maintain the disinflation trend. He said the current benchmark rate of 7.75% can be cut towards 6.5-7% by the middle of the year but room for further easing in 2024H2 is limited. Virag’s comments come after Hungarian inflation on Friday printed higher in April for the first time in more than a year. Central banks in the region turned more hawkish in general (eg. CNB) over the recent weeks as they reckon that the easy part of easing price pressures is over. Inflation is even expected to grind higher again in the second half of the year, joining the bumpy path that lies ahead for the likes of the ECB and the Fed as well. The latter’s forced delay to cut rates is a key consideration too for CE central banks looking to maintain a sufficiently attractive real rate differential for their respective currencies.

Graphs

EUR/HUF: forint extends rebound as MNB Virag indicates room for further cuts might be limited in H2 of this year

EUR/USD tries to regain 1.0811 short-term top as US yields fail to rise on higher than expected US PPI.

EUR/GBP: sterling losing modestly as BoE Chief economist Pill sounds rather optimistic on rate cuts in the near future.

Japan 10-y yield near 1.0% barrier as markets ponder further BOJ policy normalisation.