Late last week, Federal Reserve Chair Janet Yellen said the improving U.S. economy meant another interest-rate hike would probably be in order “in the coming months,” pushing the dollar to its highest since March 2016.
All things being equal, the price of Gold tends to move inversely proportional to the price of the US dollar. Hence, it wasn’t really a surprise to see Gold sink after Yellen’s comments. In fact, Gold sank to its lowest levels since February this year, touching USD1202.50 an ounce on Monday morning. Prices are down for the ninth day, the worst run in more than a year, and are heading for the biggest monthly loss since 2013.
The dollar spot index climbed 0.2 percent on Monday, which pushed EUR/USD to a 2-month low of 1.1097 and the USD/JPY to a 1-month high of 111.01. Bets on a rate hike remain at 30 percent for June and the odds are even for an increase in July, with data on Friday showing U.S. growth picked up more than was previously estimated in the first quarter.
Elsewhere in Japan, retail sales growth stalled, underscoring weakness in private consumption and increasing the likelihood that Prime Minister Shinzo Abe will delay a sales-tax increase planned for next year.
A government report on Monday showed that sales were unchanged in April from the previous month. The median forecast of economists surveyed by Bloomberg was for a 0.6 percent decline.
Abe told fellow leaders at a G7 summit last week in Japan that there is a significant risk of the world economy falling into a crisis on the scale of the 2008 financial crisis if the right policy measures aren’t taken.
That’s fueling speculation that Abe will soon announce a delay in the consumption levy hike to help support spending. Postponing the sales tax increase could bolster the popularity of Abe’s ruling Liberal Democratic Party before the election. Economists and traders are also speculating whether the prime minister may announce an economic spending package to boost the fragile recovery.
Since the previous tax hike in 2014, the economy has moved back and forth between contraction and growth. Consumer spending remains weak and inflation data released Friday shows that consumer prices are falling again.
The comments caused the Yen to weaken and stocks to surge. The Topix index added 0.7 percent to 1,359.91 on Monday, poised for its highest close since 27th April 2016. The Nikkei 225 Stock Average gained 0.9 percent to 16,985.20.
Our Picks
USD/JPY – Uptrend intact. Following a breakout at 110.54, USD/JPY is poised to head higher especially with the underlying strength of the USD due to Yellen’s comments and the weakness of the Yen due to retail sales figures.
Gold (XAU/USD) – Downtrend intact. On the H4 chart, prices have made consistent lower highs and lower lows. With the slight pause at 1202.09, there’s a possibility of a retracement. Traders should wait for the retracement and enter short around 1216.96.
S&P500 (SPXUSD) – Uptrend intact. Interestingly enough, major US stocks did not sell-off when Yellen’s comments of an impending rate hike came out. This tells us that the markets are pricing in the fact that the US economy is strengthening enough to handle higher borrowing costs.
Top News This Week
Canada: GDP m/m. Tuesday 31st May, 8.30pm.
We expect figures to come in flat (previous figure was -0.1%).
China: Manufacturing PMI. Wednesday 1st June, 9am.
We expect figures to come in at 50 (previous figure was 50.1).
Australia: Retail Sales m/m. Thursday 2nd June, 9.30am.
We expect figures to come in at 0.2% (previous figure was 0.4%).
USA: Non-Farm Payrolls. Friday 3rd June, 8.30pm.
We expect figures to come in above 175K (previous figure was 160K).
Fullerton Markets Research Team
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