Price of Gold Fundamental Daily Forecast – Weak Euro Driving Prices Lower

Gold futures are trading over 1% lower late Wednesday as the U.S. Dollar strengthened and a strong rebound in the U.S. manufacturing sector fueled hopes of a recovery in the coronavirus-hit economy.

Helping to support the dollar and pressure gold was a drop in Euro Zone inflation, which turned unexpectedly negative last month.

At 18:55 GMT, December Comex gold is trading $1347.50, down $31.40 or -1.59%.

U.S. private sector payrolls increased less than expected in August, pointing to a slowing labor market recovery, but that didn’t seem to rattle investors too much since the Fed pointed out the weakness in the labor market last week.

The focus now shifts to Thursday’s initial U.S. jobless claims report and Friday’s non-farm payroll data.

This week’s selling pressure began on Tuesday after the dollar was lifted by a U.S. manufacturing report that showed activity accelerated to a near two-year high in August, increasing optimism about an imminent recovery of the U.S. economy.

Europe’s Inflation Plunge to Raise Red Flags at European Central Bank

Euro Zone inflation turned negative last month for the first time since May 2016, raising chances that the European Central Bank will have to inject yet more stimulus to generate price growth which has undershot its target for over seven years.

Annual inflation in the 19 countries sharing the Euro fell to minus 0.2% in August from 0.4% in July, underperforming analysts’ expectations for a reading of 0.2% and a far cry from the ECB’s target of just under 2%.

Even with this stimulus in place, ECB Chief Economist Philip Lane recently warned that complacency risked entrenching low inflation and reducing price growth expectations, making it even more difficult for the ECB to deliver on its target.

Some economists took his words as a hint that the ECB is preparing to expand stimulus even further. But others noted that one-off, temporary factors had skewed inflation readings over the summer and that a mechanical rebound later is likely.

Short-Term Outlook

Most gold traders seem to be watching the Fed, but there focus may shift to the ECB. Gold is highly sensitive to the U.S. Dollar Index, and the index is mostly controlled by the movement in the Euro due to its 57% weighting.

Essentially, if the Euro continues to weaken then the dollar index will rise. A stronger dollar index will weigh on dollar-denominated gold.

The longer-term fundamentals are bullish for gold, but over the short-run, gold could feel pressure due to a strong short-covering rally by the dollar.

For a look at all of today’s economic events, check out our economic calendar.