Gold Trading Alert: The U.S. manufacturing industry is back in expansion territory, is a short counterattack coming?

In early trading in the Asian market on Tuesday (April 2), spot gold fluctuated within a narrow range and is currently trading around $2,250 per ounce. The price of gold fell back after rising higher on Monday. Earlier, as the market's expectations for the Federal Reserve's interest rate cut in June increased after the PCE data last Friday, the price of gold once hit a record high of $2,265. However, the price of gold later gave up part of the gains. On the one hand, bulls took profits. , on the other hand, the U.S. ISM only returned above the 50 mark after a year and a half of PMI data. Market expectations for an interest rate cut in June fell again, and the U.S. dollar and bond yields rose, causing the gold price to narrow its late gains to 0.8%. , closing at $2251.16 per ounce.

U.S. gold futures closed 0.9% higher on Monday at $2,236.5, hitting an all-time high of $2,286.40 per ounce.

Data on Friday showed that U.S. prices slowed in February, keeping the possibility of the Federal Reserve cutting interest rates in June alive. Federal Reserve Chairman Jerome Powell said February's inflation data was "more consistent with what we wanted to see."

Bart Melek, head of commodity strategy at TD Securities, said: "The outside view is that based on the PCE data we are seeing, the Fed will probably start to cut interest rates significantly before we reach the 2% (inflation rate) target."

Growing expectations of rate cuts, safe-haven demand and central bank buying amid geopolitical tensions have driven gold up more than 8% this year.

However, the dollar rose 0.5% to its highest level in more than four months, hitting as high as 105.07 on Monday, its highest level since November 15, making gold more expensive for holders of other currencies, while the 10-year U.S. Treasury yield also climbed. The U.S. economic data is relatively stronger than that of other developed economies, and after the U.S. ISM manufacturing PMI data was released in March, market expectations for an interest rate cut by the Federal Reserve in June fell again.

A survey report released by the Institute for Supply Management (ISM) on Monday showed that the situation of the U.S. manufacturing industry, which was hit by interest rate hikes, has improved, but risks caused by rising raw material prices still exist.

The U.S. manufacturing industry recorded its first growth in a year and a half in March as production rebounded sharply and new orders increased. However, employment conditions remained sluggish, with "massive layoffs" and input prices rising.

ISM said the manufacturing purchasing managers index (PMI) rose to 50.3 in March from 47.8 in February, the highest since September 2022 and the first time above 50 since then. The manufacturing industry accounts for 10.4% of the total U.S. economy. The manufacturing industry rebounded, ending 16 consecutive months of contraction. This is the longest contraction cycle since August 2000 to January 2002.

PMI readings above 50 indicate expansion in the manufacturing sector. Economists had predicted that the PMI would rise to 48.4 in March. The ISM and other factory surveys have grossly overstated manufacturing weakness. Manufacturing activity was dampened by rising borrowing costs.

"The message from the ISM is really leading the market, it's showing... that inflation is not all the way down, and I think the market is reacting to that quite a bit," said Eugene Epstein, head of North American structures at Moneycorp.

According to CME "Fed Watch": After the US PCE data last Friday, the probability of the Fed cutting interest rates in June once rose to 70%. However, after the release of US ISM manufacturing PMI data, the probability of the Fed cutting interest rates in June fell back to below 60%.

In the short term, the U.S. dollar index is still biased towards strength in the short term, while the gold price has risen too much in the short term. We need to beware of the risk of a short-term shock correction in gold prices.

Bart Melek also pointed out, "(Fed officials) may warn the market that they don't necessarily want to cut interest rates significantly. There is no guarantee that the Fed will start cutting interest rates, and I think they will make that very obvious, which may lead to some reversal here."

Helen Given, a foreign exchange trader at Monex USA, said, “Combined with last Friday’s PCE data, I think this still will not lead to a substantial change in the Fed’s calculations, but the market has once again begun to fine-tune its expectations for the frequency and timing of interest rate cuts this year. At present, more consistent with the Fed's forecasts."

On this trading day, you need to pay attention to the monthly rate of U.S. factory orders and February JOLTs job vacancies in the U.S., pay attention to the speeches of New York Fed President Williams, Cleveland Fed President Mester, and San Francisco Fed President Daley, and pay attention to the market's expectations for the Federal Reserve to cut interest rates. Changes in the performance of the U.S. dollar and U.S. bond yields will also affect the short-term gold price trend.

At 08:13 Beijing time, spot gold was trading at $2,248.96 per ounce.