Gold Momentum Fades? Oil Faces Crucial Test

Market Review

The US Dollar Index experienced a rocky week. At the beginning of the week, markets in the UK and the US were closed, leading to insufficient liquidity that caused the dollar to fall. Subsequently, the dollar rose to above 105 due to the weak US Treasury auction and increased risk aversion. However, the revision of US economic and inflation data, with core PCE falling below expectations, led to a resurgence in market expectations for rate cuts. Coupled with the pullback in US Treasury yields, the US Dollar Index turned down again, erasing all previous gains and closing the week lower.

Spot gold was caught in a range-bound market this week, with the amplitude significantly narrowing compared to the previous period. It only rose slightly after the PCE data on Friday before turning down, marking a second consecutive weekly decline. Additionally, gold recorded a fourth consecutive monthly increase in May, but the monthly amplitude exceeded $170.

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In terms of non-US currencies, the euro and the pound against the US dollar were both significantly influenced by the movement of the US Dollar Index. Dovish remarks from European Central Bank officials prompted traders to increase bets on rate cuts, leading to the euro against the pound reaching its lowest since August last year. Meanwhile, influenced by the interest rate differential, the yen against the pound fell to its lowest in nearly 16 years, sparking renewed concerns about depreciation. Bank of America predicts further downside potential for this currency pair. The US dollar against the yen once fell below 157.70, a level that had triggered the latest suspected intervention by Japanese authorities. Data from the Japanese Ministry of Finance shows that Japan's expenditure on two currency market interventions this year has already exceeded the expenditure on three interventions last year, suggesting that Japan's ability to defend the yen is gradually weakening.

International oil prices showed a pattern of rising first and then falling this week. At the beginning of the week, the market focused on the upcoming OPEC+ meeting on Sunday, US oil demand in the summer, and rising tensions in the Middle East. The Israeli military arrived in the center of Rafah, and more ships were attacked in the Red Sea. WTI and Brent crude oil prices rose above $80 and $84 per barrel, respectively, recording three consecutive daily gains. However, the upward movement in US Treasury yields comprehensively hit market risk appetite, dragging oil prices down. There were signs of recovery after the release of the US PCE data on Friday, with traders awaiting the OPEC+ meeting on Sunday for more guidance on supply prospects. Both weeks closed lower for the second consecutive week, with both May declines exceeding 5%.

In the US stock market, the S&P 500 Index fell to a two-week low at one point this week. The Dow Jones Industrial Average rose by 1.51% on Friday, marking the largest single-day gain since November last year. However, looking at the entire month of May, all three major stock indices rose by more than 2%, with the Nasdaq 100 Index achieving its best monthly performance since 2024, rising by more than 7%. As NVIDIA's (NVDA.O) stock price reached a new high this week, founder Huang Renxun's net worth exceeded $100 billion for the first time, ranking 15th on the global billionaire list.

The expectation of a Federal Reserve rate cut has once again received "good news"!

Friday's data showed that the Federal Reserve's preferred inflation indicator continued to cool down, with the core PCE monthly rate recording 0.2% in April, the lowest since December 2023. After the data release, the CME's FedWatch tool showed that investors expected a 50% chance of the Federal Reserve cutting rates for the first time in September, while swap traders still expected at least one rate cut this year.

In addition, the latest Beige Book released by the Federal Reserve showed that since early April, the economic growth rate and inflation in most Federal Reserve districts have been moderate, with increased consumer price sensitivity and flat or slightly increasing retail spending. The Beige Book also stated that the US economy expanded from early April to mid-May, but persistent inflation, high interest rates, and political uncertainty have led businesses to "become more pessimistic."

In other data, the US first-quarter economic and inflation data were both revised down, with the US Department of Labor announcing that the unemployment rate in more than three-quarters of major metropolitan areas rose year-on-year in April. At the same time, the US 30-year mortgage rate rose for the first time in a month, suppressing demand for home purchases and refinancing.Although the U.S. consumer confidence index unexpectedly rose for the first time in four months in May, with the average inflation expectation reaching the highest this year, respondents' views on the business environment and job market became less pessimistic. However, various signs seem to indicate that the Federal Reserve's high interest rates are taking effect, and the U.S. economy may be weakening.

In recent months, Federal Reserve officials have basically stopped expressing expectations for further policy tightening this year. This week, after the holiday, officials made a concentrated appearance but still refused to predict the specific timing of the first interest rate cut.

The "big hawk" Minneapolis Fed Chairman Kashkari said that the monetary policy stance is still restrictive, but policymakers have not completely ruled out the possibility of further rate hikes. He personally predicts that there will not be more than two rate cuts this year. Federal Reserve Governor Bowman also believes that, given the still large usage of overnight reverse repurchase agreements, it is appropriate to support slowing down the reduction of the balance sheet or reducing it at a smaller rate. Dallas Fed Chairman Logan, on the other hand, stated that the restrictive impact of high interest rates on the economy may not be as great as policymakers expected, and it is necessary to keep all policy options to maintain flexibility.

However, some officials are more optimistic about the prospects for rate cuts. New York Fed Chairman Williams said that there is ample evidence that monetary policy is restrictive, and the possibility of rate hikes is very small. Inflation is expected to continue to decline in the second half of this year. Although Atlanta Fed Chairman Bostic does not believe that there will be a rate cut in July, he also said that if a rate cut is appropriate in September, the Federal Reserve will do so, but not for political reasons.

The market generally expects that at the policy meeting on June 11th and 12th, Federal Reserve officials will revise their previous forecast of three rate cuts this year to one or two rate cuts, closer to the current expectations of the financial market. From the latest pricing in the interest rate swap market, option traders are betting that the Federal Reserve will maintain high interest rates for a longer period.

It is worth noting that Cleveland Fed Chairman Mester, who will retire in June this year, proposed that the Federal Reserve statement should be longer and an anonymous matrix could be published, connecting the series of forecasts corresponding to individuals in the SEP into a line. Coincidentally, the Federal Reserve will conduct a review of its monetary policy framework later this year.

The Cleveland Fed has appointed former Goldman Sachs partner Beth Hammack as the next chairman. She has more than 30 years of experience in finance, capital markets, and risk management. Hammack will take office on August 21st and will vote on the FOMC's monetary policy decisions at the September meeting.