The US dollar has been firming since Friday as Federal Reserve (Fed) Chair Janet Yellen hinted at the possibility of a rate increase in the ‘coming months’ at her speech last Friday. Despite the hawkish shift in Yellen’s rhetoric, a hike at the June 15-16th FOMC meeting is perhaps too early, simply because the Fed will certainly find it useful to integrate the Brexit referendum outcome into its decision, rather than not. From this perspective, the July meeting is certainly more plausible for a rate hike.
Digging into the latest US macroeconomic data, one could hardly endorse the enthusiasm in the USD buyers’ camp. Although the US’ first quarter GDP growth has been revised up to a quarterly annualized reading of 0.8% from 0.5%, the expectation was for 0.9%. The personal consumption expanded by 1.9% quarter-on-quarter, less than the 2.1% expected. The manufacturing and services PMI hinted at a slower pace of activity in the US during the month of May.
In line with the data, the probability of a Fed rate hike in June has weakened to below 40% over the last week. This week, the market is poised to see some Yellen-backed improvement in sentiment. Of course, the jobs data will be an important test for the Fed-hawks. The US economy is expected to have added 160’000 new non-farm jobs last month. The unemployment rate may have fallen below the 5% with an average 0.2% increase in wages. This is slightly less than April’s 0.3% salary growth. A soft read could further push the possibility of a June hike aside and leave the USD-bulls disappointed across the board. However, a read above 200’000 jobs could underpin appetite in the US dollar.
We could therefore expect the USD-bulls to remain in charge before the US jobs data due on Friday, although the expectations are weak.
Gold hit $1200 and bounced approximately $10 higher despite a globally more expensive US dollar. For risk averse investors, it makes sense to take a long position in gold through the US jobs week, given that the Fed hawks are walking on a tiny rope with a weak payrolls consensus of only 160’000. The chances of seeing the June hike bets tackling down by the end of the week are considerable, and the risk alone is enough to justify a safe shift towards the precious metal. The fact that gold doesn’t pay interest is a weak argument, given the uncertainties surrounding the Fed’s tightening path. Gold has potential for a recovery to $1230/1250, including the 100 and 200-day moving averages. On the downside, clearing the $1200 support should pave the way for a further cheapening toward $1170, the 200-day moving average.