Gold prices fell in Asia overnight, as the media blitz by the US Federal Reserve has the market re-evaluating the possibility of higher benchmark interest rates in three weeks. An analysis of Fed funds futures rates this morning shows that the US markets have raised expectations of a June rate hike to 26%, nearly triple the odds given a week ago.
Heightened fears of a rate hike by the Fed has rescued the US dollar and created headwinds for commodities, including gold and oil. Both WTI and Brent futures are down over 2% in morning trading.
At 10am, gold is testing support at the $1,244 level. Spot gold is down $7.40, while June gold futures are down $8.40. The $1,244 level is backstopped by $1,237. First resistance is at $1,250, then $1,254.
Gold settled lower for the third day of Friday, with June gold futures losing $1.90 to end the week at $1,252.90. Spot gold closed in the middle of the day's range on Friday, down $2.80 to $1,251.90.
The dollar is trading flat today, around the 95 mark against a basket of currencies. The onslaught of Federal Reserve regional presidents proclaiming a rate hike is nigh lifted the dollar to its third week of gains. The greenback is also being helped by a decline in the euro. The Markit flash composite PMI for the Eurozone edged down to a 16-month low, disappointing analysts who expected a modest rise.
These fears of a June rate hike have savaged global stock markets, which saw $900 billion in value wiped out in three days. Wall St. has been choppy, but with nothing like the steep losses of foreign stocks. The S&P 500, which has struggled to hold on to gains, ended Friday barely positive for the year. With earnings season over, the Fed and oil prices will be the two main movers for the markets.
Friday saw the expiration of the June contract for West Texas Intermediate crude, which resulted in speculators selling to close out long positions. Nymex crude futures still gained 3.3% for the week, and July Brent futures gained 1.9%
Oil prices have had some recent help in battling headwinds from the stronger dollar. Falling production due to warfare or natural disasters has removed approximately 2 million barrels a day from total global production.
Federal Reserve officials are really pushing the idea of a June rate hike. (We are discounting the idea, as the June meeting comes only 8 days before the Brexit vote.) St. Louis Federal Reserve president James Bullard was the latest to contribute to the barrage of pro-rate hike statements, when he said "I do worry that keeping rates too low for too long could feed into future financial instability even if it doesn't look like we're in that situation today."
Some feel that the Fed is more interested in salvaging their reputation than they are of giving the economy more time to prepared for a rate hike. While the talk of two rate hikes this year doesn't sound out of the realm of possibilities to us, we would bank on September and December as target dates.
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