Gold prices continued to close above the crucial 2300 level, a support that has been tested five times recently. A potential breakout at 2280 could have pushed gold to retest lower support levels, but ongoing geopolitical tensions have driven investors to seek the safe haven of gold. Key levels to watch are 2300, 2312, and 2315.
US Treasury Yields and Economic Indicators
On Monday, US Treasury yields paused after significant movements last Friday. The yield on the 2-year Treasury note remained stable, while the 10-year yield rose slightly by 3.4 basis points to 4.467%, ahead of the Federal Open Market Committee (FOMC) meeting and Consumer Price Index (CPI) data release. Despite the Dragon Boat holidays keeping Mainland China and Taiwan out of the market, they have returned today.
US Stocks and G-7 Macro Environment
US stocks posted small gains on Monday, but equity futures indicate a lack of momentum to sustain these gains today. The G-7 macroeconomic environment was relatively quiet, with the New York Fed's one-year ahead inflation expectations survey showing a slight decrease to 3.17% from 3.26%. This is a mild relief as other inflation measures have recently shown increasing trends.
Upcoming Economic Data and Market Expectations
Today’s focus will be on the US NFIB small firm business survey and the UK’s labor data for April. Tomorrow, global financial markets will closely watch the release of the FOMC’s dot plot, which could significantly impact market sentiment. The dot plot provides insights into how the 19 top policymakers in the Federal Reserve system anticipate interest rate policy evolving over the next few years.
The Significance of the Dot Plot
The dot plot, published quarterly, offers an anonymized snapshot of the Federal Reserve's policy outlook. In March, the median projection indicated three interest rate cuts this year. However, given recent high inflation readings and strong economic growth, analysts now expect the median projection to show only two rate cuts.
Potential Market Reactions
Steve Englander of Standard Chartered Bank estimates there is a 30% to 40% chance that the median dot will show only one rate cut this year, which would be a significant hawkish surprise for markets anticipating more aggressive rate reductions. This potential outcome could dampen market optimism and impact investor expectations.
Conclusion
Gold's stability above the 2300 level reflects ongoing investor caution amid geopolitical tensions and key economic data releases. The upcoming FOMC meeting and dot plot release will be critical in shaping market expectations and the future direction of US monetary policy.