Categories: Markets

Gold Price Forecast: Russia-Ukraine tensions keep dollar strong ahead of PMI

Gold Price Forecast: Russia-Ukraine tensions keep dollar strong ahead of PMI
  • Rising tensions surrounding the Russia-Ukraine war support the US dollar in a risk-off state.
  • The trading week begins in the United States with the release of February PMIs on both sides of the Atlantic.
  • Gold traders will scrutinize the minutes of the latest Federal Reserve meeting for more clues on monetary policy.
  • PCE disinflation should continue, but any surprise could have a notable impact on the gold price.

The price of gold (XAU/USD) trades on the wrong foot again on Tuesday, as it moves near the $1,830-$1,835 support region, the 38.2% Fibonacci retracement zone of the November 2022-January 2023 uptrend. US dollar in the market rises again due to the growing geopolitical tensions one year after the Russian invasion of Ukraine and a day after US President Joe Biden made a major appearance in kyiv. Russian President Vladimir Putin’s State of the Nation address in a busy European session on Tuesday could have a significant impact on market risk sentiment and therefore the price of gold.

German manufacturing PMI in the red, gold price continues to fall

During the European session, the preliminary reports of the S&P Global Purchasing Managers’ Indices (PMI) for the month of February were published. The all-important German manufacturing PMI came out in the red at 46.5 (vs. 47.8 expected), showing that Europe’s economic engine remains weary of high energy prices and inflation as the war between Russia and Ukraine continues. Despite the fact that the services and composite PMIs for both the German economy and the Eurozone as a whole came out better than expected, the price of gold was sold after the release, as the US dollar remains higher in all areas.

Markit Economics will also publish February preliminary releases for US S&P Global PMIs across all sectors, expected to be in contraction territory (below 50) overall, but picking up a bit of strength compared to January.

If S&P Global Services PMIs show rising wages continue to add to input price pressures, the US dollar is likely to remain strong and limit potential gains from the gold price recovery. On the other hand, if the headline PMI data is lower than expected and is combined with a decline in private sector payrolls, the dollar could take a hit and the XAU/USD pair could rise.

Small details in the FOMC minutes can influence markets

The Federal Reserve (Fed) will publish the minutes of its last monetary policy meeting on Wednesday at 19:00 GMT, in which the Federal Open Market Committee (FOMC) will evaluate monetary policy. It will be key to see whether some policymakers felt it necessary for the Fed to reconsider the 50 basis point rate hike if they saw sufficient evidence to suggest that the slowdown in inflation was temporary. This fact could revive bets for a rise of 50 basis points in the next meeting and weigh on the price of gold.

Otherwise, markets are unlikely to place too much weight on the FOMC minutes ahead of the Fed’s March meeting, when the revised Summary Forecasts will be released.

Continuation of the disinflation trend of the US CPI.

The US Bureau of Economic Analysis (BEA) will publish on Friday at 13:30 GMT the Personal Consumption Expenditure (PCE) Price Index, the Fed’s preferred indicator of inflation. Gold traders and investors will closely watch the data release as core PCE inflation is forecast to rise by 0.4% per month. However, the annual figure is expected to decline to 4.1% in January from 4.4% in December. The market reaction should be direct, with lower than expected monthly CPI inflation weighing on the US dollar and vice versa, with the gold price reacting in the opposite direction.

Considering that the CPI report already revealed that inflation was stable in January, it would be surprising if this data had a lasting impact on the markets.

Commerzbank lowers gold price forecast to $1,800 by mid-year

Commerzbank strategists have noticed the correction in the gold price observed during the month of February and, consequently, have adjusted their mid-year target for the yellow metal downward:

“In response to the Fed’s steeper rate hikes – we now expect rates to peak at 5.5% – we have lowered our mid-year gold price forecast to $1,800 (was $1,850). However, the second half of the year should see a durable recovery, as the US economy is then likely to experience a slump that is likely to trigger further rate-cutting expectations. Therefore, we maintain our year-end forecast at $1,950.”

Gold Price in 2023: Ups and Downs

The financial markets have been a tale of two tales for the first part of 2023, in which the price of gold has reflected in its price action like no other asset. XAU/USD maintained a bullish trend throughout January on market optimism about slowing inflation and continued dovish comments from the Federal Reserve, only to return sharply to the old dynamics in February, following the encouraging report from non-farm payrolls (NFP). The fact that the US economy created more than 500,000 jobs in January changed market expectations that the Fed would ease its monetary policy, and the dollar returned to the throne of the king of the market.

The price of gold opened the year at $1,823.76 and reached a year-to-date high of $1,960 on February 2, right between the Federal Reserve’s first meeting of the year and the surprising release of the US jobs report. from January. Since then, the downtrend has been relentless, reaching levels close to the annual opening, around $1,830.

Gold price daily chart

Source: Fx Street