Gold Wobbles Ahead of Global PMIs

Gold prices show continued volatility but lack direction as investors wonder how much the global economy will be impacted by the war in Iran, with the upcoming April Flash PMIs providing crucial insight.

What's Moving the Market

• Crude prices stabilise amid the Strait of Hormuz closure and the oil market's adaptation to the new supply paradigm.
• Gold awaits a catalyst amid monetary policy uncertainty as economists try to judge how much energy prices will affect inflation.
• PMIs are expected to show continued constraint due to the situation in the Middle East, but not a major shift into contraction.

Flash PMIs Amid Inflation Pressures

Amid the ongoing war in Iran, markets are beginning to adapt to a new normal, with the Strait of Hormuz opening and closing repeatedly. However, each time Iran slams the door on the Strait, the jump in crude prices becomes smaller as traders become accustomed to the situation. Despite the impending end of the ceasefire and the absence of crude ships leaving the Persian Gulf, Brent has fallen below $100 per barrel. Part of that can be attributed to the global supply chain adjusting to the new reality, leaving oil prices around 50% higher than before the war began. However, that's far from the peaks seen following Russia's invasion of Ukraine ($130), even when not adjusted for inflation. Although a substantial amount of production remains trapped in the Gulf, rerouting has helped cover some of the slack and has increased production in other parts of the world. Of course, this sentiment could suddenly reverse if the war flares up again, threatening to damage production facilities in the Gulf.

Market attention has shifted to potential economic impact, with the initial round of data showing inflation fears are not as bad as initially thought. Futures have shifted to around 50-50 odds of a Fed rate cut by the end of the year as confirmation hearings for Jerome Powell's replacement in May get underway. The implication is that the Fed will be able to "look through" a temporary bump in headline inflation, but the effect of the war will be transitory. Traders will be looking for confirmation of that thesis in Thursday's flash PMI figures, which will give an early look at global pricing dynamics.

Europe, in particular, will be in focus, as its slow growth makes it particularly vulnerable to energy disruptions and to the potential for the ECB to raise rates. The Eurozone composite PMI is anticipated to dip to 50.3 from 50.7 in March, remaining in expansion territory despite the services sector being expected to slip into contraction. The UK manufacturing PMI is expected to fall into contraction by the bare minimum, to 49.9 from 51.0 previously. Meanwhile, the US composite Flash PMI is expected to also slip into contraction at 49.9, down from 50.3 in March.

Gold Looking for a Catalyst

Gold prices have fluctuated substantially over the last week but have largely trended sideways amid the uncertainty. Traders are looking to see whether higher inflation will push up interest rates or a resolution of the war will restore risk appetite and drive down the dollar. Thursday's data could help answer half that question, as the price component could indicate whether inflation pressures are increasing or stabilising in the second month of the war. If PMIs are depressed, it could mean the global economy comes under pressure and provide the catalyst gold needs to rise back towards $5,000 per ounce.

Gold Turns Higher: Range or Breakout?

For now, gold is holding the $4700 support after reversing earlier losses to $4670 and returning to the Bollinger Bands area. However, if the $4790 line holds firm in the event of another short-term leg higher, prices could quickly revert, aiming for $4650 and $4550. On the other hand, further continuation would open up the upper BB at $4870, with a breakout exposing the $4900 and the $5K handle.

Source: SpreadEx | Gold, 4-Hour Chart