GOLD

-Stagflation risk is still lingering as indicated by the latest April US ISM Manufacturing and Services PMI data.
-A not fully priced-in stagflation risk scenario may support another bullish impulsive upmove sequence for Gold (XAU/USD).
-Watch the key medium-term pivotal zone of US$2,260/2,210 for Gold (XAU/USD).

Since our last publication, Gold (XAU/USD) has inched lower to print a low of US$2,277 last Friday, 03 May. All in all, it has declined by -6.3% from its current all-time high of US$2,431 on 12 April amid key risk events and data such as the outcome of Fed Chair Powell’s monetary policy press conference and the US non-farm payrolls jobs date for April.

The markets do not seem to pay much attention to the US ISM Services PMI data which is considered a leading economic indicator to gauge the state of the US economy. Market participants embraced a risk-on behavior mentality triggered by a weaker-than-expected April NFP that added only +175K jobs, below the consensus of +243K, and below March’s print of +315K which suggests that the US jobs market is still expanding at a brisk pace that reduces the odds of an interest rate hike by the Fed; a state of “Goldilocks” scenario for the US economy.
On the other hand, the services sector which contributes close to two-thirds of US economic growth is showing signs of an acute slowdown as indicated by the latest data from the US ISM Services PMI that contracted to 49.4 in April, its first contraction since December 2022, below consensus of 52.0.

In addition, one of its sub-components, the ISM Services Prices (considered as a gauge of business costs for the services sector in the US) rose to 59.2 in April from 53.4 in March and above expectations of 55.

Overall, we have seen similar trends in April ISM Manufacturing PMI and its Manufacturing Prices sub-component albeit at a steeper pace of increase versus Services Prices (see Fig 1).

These latest data points suggest a potential stagflation environment akin to the 1970s when the Fed had its hands tied to prevent it from enacting an accommodating monetary policy which in turn may support the ongoing major bullish trend in Gold (XAU/USD) in place since September 2022.

The daily RSI momentum indicator of Gold (XAU/USD) has shaped a rebound right above a key parallel ascending support at around the 50 level which suggests a positive medium-term momentum revival while price actions are still holding above the 50-day moving average, an indication that the medium-term uptrend phase in place since 14 February 2024 is still intact (see Fig 2).

Secondly, the short-term corrective pull-back from the 12 April 2024 all-time high of US$2,431 has transformed into a potential bullish “Descending Wedge” configuration since 26 April which implies that the short-term downside momentum inherent in the two weeks of corrective pull-back has started to ease.

Watch US$2,260 (upper limit of the medium-term pivotal support) and the first short-term hurdle the bulls face is likely the US$2,350/365 near-term resistance zone. A clearance above it sees the next immediate resistance coming in at US$2,420 (current all-time high area) and US$2,450 in the first step (see Fig 3).

However, failure to hold at US$2,260 may see an extension of the short-term corrective decline to expose the next supports at US$2,235 and US$2,210 (lower limit of the medium-term pivotal support & the 50-day moving average).

AUDUSDThe Australian dollar has started the week with modest gains. AUD/USD is up 0.25%, trading at 0.6624 in the European session at the time of writing. The Aussie is coming off a strong week, having gained 1.19%.

RBA widely expected to pause

The Reserve Bank of Australia meets on Tuesday and is widely expected to hold the cash rate at 4.35%, a 12-year high. The central bank has maintained rates three straight times and there is a strong likelihood that the rate statement will be hawkish, as inflation in the first quarter dropped from 4.1% to 3.6% but was above the market estimate of 3.4%.

Inflation has come down significantly but remains sticky as the RBA tries to bring it back down to the 2%-3% target range. The RBA is making its rate decisions based on the data and that has the markets guessing as to what the rate path will look like. A rate cut isn’t coming until inflation falls and the RBA doesn’t expect inflation to fall within the target range before 2025.

If inflation resumes its downward path in the next few months we could see a rate cut in November but at the same time, the risk of a rate hike has increased since the Q1 inflation report. As well, the job market has been tighter than anticipated, which makes it more difficult to lower rates. The RBA was very late in starting its rate-tightening cycle and policy makers will be very hesitant to lower rates until they are confident that inflation won’t rebound.

USDJPY
USDJPY edges higher on Monday after a pullback from new record high (160.19) was contained by strong Fibo support at 151.72 (61.8% retracement of 146.48/160.19 upleg, reinforced by 55DMA). Strong rejection here left a Hammer candle on Friday, initial signal of reversal, which could be boosted if today’s bounce completes a bullish engulfing pattern.

However, more evidence is still required to generate reversal signal (break and close above 155.04 (Fibo 38.2% of 160.19/151.85 bear-leg). Conflicting daily studies (negative momentum / mixed setup of MA’s / oversold stochastic) lack clearer direction signal for now. Sustained break above 155.04/29 (Fibo / 10DMA) to firm near-term structure and signal bottom (151.72) and open prospects for further recovery. Conversely, the downside will remain vulnerable if recovery fails to regain 155.04 pivot, with increased downside risk expected on rejection at initial Fibo barrier at 153.82 (23.6% of 160.19/151.85).

EURUSD
Eurozone PPI falls -0.4% mom, -7.8% yoy in Mar
Eurozone PPI fell -0.4% mom, -7.8% yoy in March. For the month, industrial producer prices increased by 0.1% for intermediate goods, 0.1% for capital goods, 0.1% for durable consumer goods, and 0.4% for non-durable consumer goods. Prices decreased by -1.8% for energy.
EU PPI fell -0.5% mom, -7.6% yoy. Among Member States for which data are available, the largest monthly decreases in industrial producer prices were recorded in Bulgaria (-3.4%), Denmark and Greece (both -2.3%) and Spain (-2.2%). Increases were observed in Ireland and Sweden (both +0.9%) as well as in Germany and Croatia (both +0.2%).

Prepared by: Mr. SAM KIMA, Senior Vice President