FX Spotlight | Gold: Fed’s tapering talk may contain rallies | Article – HSBC VisionGo
- Gold price rose last Friday, as US employment data for May pulled down the USD and US Treasury yields
- In our precious metals analyst’s view, gold is likely to push a little higher over the near term, as US Treasury yields look sluggish…
- …but if the Federal Reserve’s (Fed) tapering debate picks up, gold rallies may be tested
US employment data for May came in below expectations, weighing on the USD and US Treasury yields
The USD and US Treasury yields swing on US surprise economic data, leaving gold open to increased volatility, in our precious metals analyst’s view.
The downside surprise of the US jobs data for May (released on 4 June) undermined the USD via a drop in US Treasury yields and allowed for the gold recovery. US nonfarm payrolls rose 559k in May, somewhat below consensus expectations (+675k), but roughly twice as fast as the 278k increase in April (Bloomberg, 4 June 2021). In our economists’ opinion, US employment continued to recover solidly in hard-hit sectors, with average hourly earnings for leisure and hospitality jobs rising noticeably. This signals hiring challenges as activity ramps up.
Fed’s tapering debate is data-dependant, in our economist’s view
In our economists’ view, US labour and earnings data are important benchmarks, as the Federal Open Market Committee (FOMC) may soon begin to discuss how a tapering of its asset purchases would unfold, even as it awaits more economic data to determine when it may become appropriate to implement such a plan. If US job gains were to average 500,000 per month going forward, it would still take until towards the end of 2022 to return the employment-to-population ratio to its pre-pandemic 61% level, according to our economists’ estimation.
An increase in tapering talk has the potential to weigh on gold, in our precious metals analyst’s view
Our economists expect that the FOMC may begin discussing tapering tactics as soon as at its 15-16 June meeting and announce tapering its current USD120bn per month in asset purchases in December. Before entering into the blackout period on 5-17 June (which Fed officials generally do not speak publicly), Dallas Fed President Robert Kaplan, an advocate for tapering, suggested that the US has weathered the COVID-19 pandemic. Kaplan advocated, “adjusting our purchases with a view to taking the foot off the accelerator gently, gradually, so we can avoid having to depress the brake down the road”, when speaking at a virtual event at Rice University on 3 June (Reuters, 3 June 2021). However, New York Fed President John Williams said on the same day, we are still ways off maintaining the substantial further progress required before there are adjustments to the Fed’s asset purchase programme (Bloomberg, 3 June 2021). But at the very least, discussing that tapering is on the cards, even if the commencement of tapering may still be further down the road, can be a powerful headwind to gold, in our precious metals analyst’s view.
Our precious metals analyst believes a weaker USD and sluggish US Treasury yields should support gold to stay firm over the near term
Despite the possible increase in the tapering debate, other developments, such as escalating trade tensions and increases in central banks’ gold reserves, are supportive for gold. Gold is most likely to push a little higher over the near term, as the US Treasury yields and the USD look sluggish and may consolidate around USD1,900 per ounce, in our precious metals analyst’s view.
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