Short-Covering Boosts Gold Prices Ahead of Thursday’s ECB Meeting

According to the U.S. Labor Department, producer prices increased more than expected in May, producing the biggest annual gain in nearly 6 ½ years, but underlying producer inflation remained moderate.
James Hyerczyk
Comex Gold
Comex Gold

The U.S. Dollar closed lower against a basket of currencies on Wednesday, erasing gains made earlier after the U.S. Federal Reserve issued a more hawkish monetary policy statement than expected. Traders said the central bank’s statement strongly signaled two more rate hikes by year-end because of a solid outlook for the world’s biggest economy.

The counter-intuitive move was fueled by profit-taking and position-squaring ahead of Thursday’s European Central Bank meeting. The ECB is widely expected to leave interest rates unchanged. However, traders have been speculating for weeks that the central bank will discuss the timing of winding down its 2.55-trillion-Euro Bond-purchase program.

There are also so investors who believe the ECB will refrain from signaling changes to its stimulus program given the potential for renewed tensions in Italy and Spain as well as recent weaker-than-expected economic data in the Euro Zone.

U.S. Federal Reserve

As widely expected, Fed policy makers raised its benchmark interest rate by a quarter percentage point for a second time this year, to between 1.75 and 2.00 percent. The Federal Open Market Committee also projected two more rate hikes by the end of the year, compared to one previously.

Finally, it also ended its promise to keep rates low enough to strengthen the economy for “some time” and signaled it would tolerate above-target inflation at least through 2020.

U.S. Economic Data

According to the U.S. Labor Department, producer prices increased more than expected in May, producing the biggest annual gain in nearly 6 ½ years, but underlying producer inflation remained moderate.

The Producer Price Index for final demand rose 0.5 percent last month, helped by a surge in gasoline prices and continued gains in the cost of services. In the 12 months through May, the PPI increased 3.1 percent, the largest advance since January 2012. Economists were looking for a 0.3 percent gain.

Core PPI rose 0.3% versus a forecast of 0.2%.

Gold

Gold prices initially fell after the Fed raised rates, but prices rebounded to close higher as the U.S. Dollar weakened ahead of Thursday’s European Central Bank monetary policy statement. A mixed performance in the U.S. Treasury markets also contributed to the late session surge.

Crude Oil

Crude oil closed higher on Wednesday, reversing earlier losses, after U.S. government data showed a bigger weekly draw than expected in domestic crude inventories. According to the U.S. Energy Information Administration, crude inventories fell by 4.1 million barrels in the week-ending June 8. Traders were expecting a decrease of 2.7 million barrels.

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