Gold Trading Alert: Poor U.S. GDP weighs on the U.S. dollar, gold prices hold on to key support to welcome U.S. PCE data

In early Asian trading, spot gold fluctuated within a narrow range near the 2330 key. U.S. first-quarter GDP growth, released on Thursday, fell short of market expectations, dragging the U.S. dollar index to a nearly two-week low, helping gold prices stay above the key support of the Bollinger Band, even as U.S. Treasury yields showed signs of stubborn inflation after economic data It has since risen, dampening hopes that the Federal Reserve will soon cut interest rates.

Spot gold rose 0.7% to $2,332.30 an ounce on Thursday. Gold prices have fallen nearly $100 after hitting a record high of $2,431.29 on April 12 due to geopolitical turmoil. U.S. gold futures closed 0.2% higher, settling at $2,342.5.

The U.S. dollar index fell 0.23% on Thursday to close at 105.57. The intraday low hit 105.46, a new low since April 12. Earlier data showed that U.S. economic growth slowed more than expected in the first quarter, but rising inflation suggested that the Federal Reserve would not cut interest rates before September. If this trend continues, it will put the Fed in a dilemma.

For much of their battle against the surge in inflation caused by the coronavirus pandemic, Fed officials have said a period of below-trend economic growth is needed to push price pressures back to target, after a 1.6% expansion in the first quarter. The speed meets this standard. Previously, economic growth had been above 1.8% for some time, which is the median trend level that the Fed estimates will not increase inflationary pressures.

However, price pressure remains sticky. Data released on Thursday also showed that the personal consumption expenditures (PCE) price index increased at an annual rate of 3.4% in the first quarter, while the Federal Reserve's inflation target is 2%.

Investors and analysts were initially more focused on high inflation data than on the possibility that the economy was finally showing signs of the cooling the Fed expected.

According to CME's FedWatch tool, the odds of a first Fed rate cut have dropped across the board, with odds of a June rate cut now less than 10%, odds of a September rate cut falling below 58%, and odds of a second rate cut in December low. at 50%.

Nationwide Financial market economist Oren Klachkin said there is reason to believe that the 1.6% growth rate in the first quarter exaggerated the degree of economic weakness, and the huge drag caused by imports and inventories is unlikely to continue this year.

At the same time, "the current level of inflation does not give the Fed confidence that it will achieve its 2% goal anytime soon," he said. "A higher and longer interest rate environment may prevail."

The annual GDP growth rate in the first quarter was lower than economists expected and was significantly slower than the 3.4% growth rate at the end of 2023. The drag on growth from imports and inventories is actually a mirror image of what happened in early 2022, when U.S. GDP growth fell throughout the first half of the year, triggering warnings of an impending recession. Both elements of GDP are volatile, and in the case of inventories, weakness in one quarter tends to drive strength later in the year, with businesses selling goods first and then replenishing inventories.

In 2022, the U.S. economy had six quarters of above-trend growth after forecasts of a recession. The Fed must now look to other sources - such as employment data and upcoming monthly inflation data - to determine whether the economy is indeed weakening and whether price pressures can begin to ease again after growing faster than expected over the past few months.

Bob Haberkorn, senior market strategist at RJO Futures, said: "Gold is trading accordingly as more data shows that the Federal Reserve will not cut interest rates soon."

U.S. Treasury yields hit their highest in more than five months after the data was released. This limited the rise in gold prices.

The latest article by "Fed Speaker" Nick Timiraos pointed out that Thursday's economic activity report sounded the latest alarm bell for investors and Federal Reserve policymakers. They have been holding their breath, expecting that falling inflation will officially start cutting interest rates this summer. Data showed that U.S. inflation was more stubborn than expected for the third month in a row after cooling off perfectly in the second half of last year. So far this year, individual economic growth and price data have not been enough on their own to significantly change the Fed's outlook. But the cumulative impact of these consecutive disappointing numbers is significant. In particular, inflation data has been stronger than expected, with revisions to inflation data rising in subsequent reports in recent months. The trend has prompted investors and Fed officials to reconsider whether a rate cut this year is appropriate.

Friday's March monthly inflation data (PCE) will be scrutinized to determine whether the higher-than-expected quarterly figure in the GDP data will translate into an acceleration in March price increases, or upward revisions to the January and February figures. The April jobs report will be released next Friday.

Until there is more clarity on job and wage growth and more price data, the Fed may have no incentive to revise its message that it will keep interest rates at current levels.

“First-quarter GDP growth was weaker than expected, but inflation was stronger than expected, making it uncomfortable for Fed officials who are considering when to cut interest rates this year,” Citi economists wrote, predicting “cracks in economic activity and labor market data.” “That could still leave room for a summer rate cut.

David Meger, head of metals trading at High Ridge Futures, said: "Gold is currently consolidating after rising sharply over the past few weeks. Of course, if we see very benign inflation data and a much lower inflation rate, that could be the case in the short term. change."