Gold surges to 1-month high, as U.S. inflation hits 40-year high Gold rose to a one month low on Friday, as U.S. inflation continued to increase to record levels. Data on Friday showed that inflation in the United States rose to 8.6% in May, its highest level in over forty years. Markets had expected CPI to climb to 8.3%, however figures exceeded expectations. Several U.S. indices fell on the news, with the Dow Jones dropping by over 700 points on the news. The S&P 500 was 2.5% down as of writing. FTSE 100 slips, following rise in UK inflation expectations The FTSE 100 also fell during today’s session, as data showed that UK inflation expectations also rose. Following a survey from the Bank of England, expectations for inflation over the year rose to 4.6%. Despite multiple rate hikes, British consumers continue to expect prices to trend upwards in upcoming months.  A rise in the cost of energy is one of the main factors in the increased expectations. The BOE’s Chief economist Hue Pill stated that, “I personally think there is more that needs to be done in this transition from what has been a very supportive monetary policy for the economy really going back to the financial crisis, through the fallout from Brexit and the pandemic”. London’s FTSE closed the week 2.12% lower.

Next week, the US Fed will set the next interest rate step and increase the range for the key interest rate by 50 basis points (bp) to 1.25-1.5%. The guidance for the markets should not bring anything new. The FOMC, the body that decides on monetary policy, should continue to assume a series of rate hikes and Fed Chairman Powell will confirm that 50bp rate hikes are on the table at the upcoming meetings. This continues the course of the last meeting in May, as the economic data has not brought any serious changes since then. The labor market has been essentially consistently strong and inflation has remained high. There will also be new estimates from meeting participants on the development of the main macro variables, including the key interest rate. Compared with the last forecasts in March, expectations for the federal funds rate should be raised. At that time, the median estimate was 1.9% at year-end 2022, which would imply rate hikes of 100 bp, including next week's rate hike. By comparison, the market is currently pricing in double that. FOMC members will likely revise their expectations upward; the question will be whether to the same extent as market expectations. Since there will be only four meetings after next week's meeting, the assessments should carry some weight. At the same time, however, it is unlikely that FOMC members' estimates will differ significantly from market opinion. Estimates for year-end inflation could be raised somewhat. Growth for 2022, on the other hand, should be revised noticeably, as the last forecasts were issued before the release of the surprisingly weak 1Q data. Overall, the inflation and growth forecasts should not have a significant impact on the markets. So, in sum, next week's FOMC meeting should have little impact on the markets but should confirm the path and set the next step. For the rest of the year, including next week's rate step, we expect rate hikes of 150 bp. June should be followed by a 50 bp rate hike in July as well. Due to a slowdown in the US economy and falling inflation rates, we expect interest rate hikes of 25 bp in September and November before the Fed decides to at least pause its rate hikes in December. Download The Full Week Ahead

The war in Ukraine brings multiple negative consequences, not only to the world economy. Russia's invasion also has a wide impact on the gold market. The Consequences Are Vast The war in Ukraine has been ongoing for more than three months. After the withdrawal from the north of Ukraine, Russia has focused on the east and south of the country, aiming to take full control of Donbas and to create a land corridor between it and Crimea. The consequences of a Russian invasion into Ukraine are far-reaching in many areas. The war is a humanitarian crisis. Thousands of people died, while millions fled the country. Ukraine was also severely hit economically. The GDP is forecasted to fall this year by 35% or even more on top of the vast destruction of the country’s infrastructure (the total amount of direct infrastructure damage has surpassed $100 billion), reduced labor supply, and halted investments. The Russian economy is projected to decline by 8.5% or even more due to the sanctions, financial crisis, and the closure of economic ties with the West, including the withdrawal of many companies from Russia. There is a global food crisis. Russia and Ukraine are significant producers of many agricultural products. They produce 60% of the world’s sunflower oil and account for almost 30% of wheat exports. Ukraine is also a leading exporter of corn, barley, and rye, but because of the war, many crop areas won’t be planted or harvested. What’s more, both Ukraine and Russia are also major producers of fertilizers. Additionally, because of the naval blockade, Ukraine’s ability to export its commodities is severely limited. The rise in food (and fuel) prices (see the chart below) could aggravate the food insecurity in some parts of the world, increasing the risk of unrest. There is a global energy crisis as well, as Russia is the second-largest producer of natural gas and the third-largest producer of oil. The EU is particularly severely hit as it is most dependent on Russian energy. The rise in food and energy prices is adding to the inflationary pressure and is hampering GDP growth. The war is a negative supply shock which is stagflationary in nature. The IMF has already cut its forecast for global growth this year from 4.4% to 3.6%, mainly because of the Russian invasion. The war will also have important long-term geopolitical consequences. The Russian invasion reenergized NATO, prompted Finland and traditionally neutral Sweden to apply for membership in this military alliance, and triggered an increase in military spending across all of Europe, including pacifist Germany. Moreover, Russia’s position will weaken, as its failure – despite the huge military advantage – to defeat Ukraine shows that, in reality, it’s a less powerful country than people feared. The huge military losses in terms of soldiers and equipment will weaken Russia’s military strength for years. What’s more, Europe is reducing dependence on Russian hydrocarbons, the major country’s leverage. Russia is effectively cut off from Western economic integration and will probably be driven into a closer and more subservient relationship with China. How Will This Affect Gold? OK, but what does it all mean for the global economy and the gold market? Well, we are experiencing higher inflation and slower economic growth, so we are moving closer to stagflation, which should support gold prices. The Russian invasion is also another blow to globalization and global supply chains, which increases the odds of permanent fragmentation of the world economy into geopolitical blocks, as known from the Cold War. Such changes in the global order would be negative for productivity, also leading to slower growth and higher prices. Compared to the pre-war reality, we live in a much less secure world. After all, there is an ongoing full-scale war on European soil. A “peace dividend” has ended, and military spending will have to go up, leading to slower growth in the standard of living. The rise in uncertainty should also increase demand for safe havens such as gold. On the other hand, because inflation is projected now to remain elevated for much longer, the central banks will be under pressure to tighten their monetary policies more decisively. The more aggressive Fed’s tightening cycle should be negative for gold prices, at least until it triggers a grave economic slowdown or even recession. What’s more, the war has more negative economic consequences for Europe, which is more dependent on Russian energy, than for the United States. Hence, the dollar should strengthen against the euro, negatively affecting gold prices. That’s true that the ECB is expected to join the club of monetary hawks, but given the war’s impact on economic growth, Lagarde can be more cautious with interest rate hikes than Powell, which should also support the greenback.

EUR/USD fail in sustains the upside trend momentum. The major pair broke a two-week trading range on Thursday. The momentum oscillator, like the Relative Strength Index, holds onto the oversold zone with no signs of corrections in the near term. The EUR/USD edged lower today in the initial New York session. The major pair broke a two-week trading range after hitting the June high at 1.0773 yesterday. At the time of writing, EUR/USD was trading at 1.0532, down (-0.7607%) for the intraday. Having said that, in a previous analysis, the downside potential had the upper hand for the European currency pair. However, the pair started its downside journey after it was able to break the support level of 1.0678, which was able to guard the price against falling too far. On the 4-hour chart, the major currency pair edges lower, back to levels last seen on May 20. Furthermore, the 21-period sustained trading below the 50-period on the Moving Average (MA) indicates more downside in the not-so-distant future. On the other hand, the Relative Strength Index (RSI) holds onto the oversold zone, recording 28 on the value line as the decrease in momentum still has a vacancy. The aforementioned formation indicates an extension of the current trend, and that will be the more likely scenario to occur. EUR/USD encounters the first hurdle around 1.0521. If a successful breach occurs at the previously mentioned hurdle, that would pave the way towards 1.0498, followed by 1.0460, which was last seen on May 18th. Alternatively, buyers should wait for a decisive breach of the 1.0545 resistance level to validate the upside potential. The sustains above the aforementioned level would open the door towards the 1.0572 resistance level, followed by 1.0597. exploding that level will bring us back to the critical resistance level at 1.0643.

If history is to repeat itself to some extent, junior miners have a chance to make minor corrections. However, is it worth leaving short positions now? Let’s take a look at what happened in junior mining stocks. In last Friday’s (June 3) Gold & Silver Trading Alert, I commented on Thursday’s rally in the following way: The price of the GDXJ ETF – a proxy for junior miners – moved sharply higher yesterday, and this got many people excited. High volume confirms that. It’s natural for most investors and traders to view rallies as bullish, but let’s keep in mind that most traders tend to lose money… It’s not that simple. After all, the best shorting opportunities are at the tops, which – by definition – can only be formed after a rally. The particularly interesting thing about high volume readings in the GDXJ ETF is that they quite often mark local tops. Remember the late-April – early-May consolidation? It ended when GDXJ finally rallied on high volume. That was the perfect shorting opportunity, not a moment to panic and exit the short position. The GDXJ-based RSI indicator is also quite informative right now. It moved well above 50, but it’s not at 70 yet. Why would that be important? Because that’s when many of the previous corrections ended. When one digs deeper, things get even more interesting. You see, when we consider corrections that started after the RSI was very oversold (after forming a double bottom below 30), it turns out that in all those cases, the tops formed with the RSI between 50 and 70. I marked those situations with blue ellipses on the above chart. So, while it’s easy to “follow the action,” it’s usually the case that remaining calm and analytical leads to bigger profits in the end. Also, let’s use yesterday’s move as something useful. If this single-day move higher made you really uncomfortable and almost made you run for the hills, it might be a sign that the size of the position that you have is too big. It’s your capital and you can do with it what you wish, but if the above were the case, it might serve as food for thought. The big trend (as well as the reasons for it) remains down, which means that the enormous profit potential remains intact. Last Friday’s and this week’s declines confirm the above. The high-volume rally marked the top – those who got excited at that time likely bought exactly or very close to the top, instead of shorting at that time. Fortunately, you were prepared. After taking profits off the table and closing short positions on May 12, we immediately entered long positions (it turned out that it happened right at the bottom), and we then took profits from that long position on May 26. Next, we returned to short positions. These positions are already profitable, but it seems that they will be much more profitable soon. Why? Most importantly, because history rhymes, we’re likely to see a repeat of 2012-2013 or the 2008 decline. So far, the current slide is in tune with the 2008 performance. However, let’s not dig into the long-term details yet. While we’re close to the short-term chart, let’s focus on what it features. For your convenience, here it is once again. The recent April-May decline doesn’t have to be repeated to the letter, but we could see something similar nonetheless. After all, that decline is the most recent analogy to what we’re about to see in the GDXJ (a massive decline). Based on the above, I marked two cases from the precious decline (the initial decline and the entire decline) and I copied them to the current situation, assuming that the recent top is indeed the starting point of the next bid decline (which seems likely in my view). It turns out that junior miners might need to decline to or slightly below the May lows before we see even a moderate corrective upswing. Will I want to trade this correction? Probably not. If we see a correction from below $35, it might be small – only a bit over $36, so it might be way too risky to trade this quick rebound. The downside (the bigger orange rectangle) is much bigger than the above, and it would be a much bigger waste to miss this move in order to try to catch a relatively small move. Besides, there’s also a chance that we won’t see any meaningful correction, just like what happened in 2020. Back in March 2020, after the corrective upswing, mining stocks fell like a stone in water. While the current price moves are less volatile, they are still somewhat similar (note the marked areas on the above chart). Moreover, please note that...

Key highlights The British public's expectations for the rate of inflation in a year's time have risen to their highest in records going back to 1999, a quarterly survey by the Bank of England showed. The public's median inflation expectation for 12 months' time rose to 4.6% in May, up from 4.3% in February's survey. Expectations for two- and five years' time rose to 3.4% and 3.5%, the highest since 2013 and 2019 respectively. Credit growth in China picked up in May, after the central bank leaned on the country's commercial banks to do more to support an economy suffering from COVID-19 lockdowns and a grinding real estate crisis. The People's Bank of China said Total Social Financing, grew by 2.79 trillion yuan after slumping to only 910 billion yuan a month earlier, when the key financial hub of Shanghai joined the list of regions and cities under COVID-19 lockdown measures. Japanese imports likely jumped in May at the fastest pace in six months, buoyed by surging raw material prices and the yen's decline to two-decade lows, a Reuters poll showed on Friday. Rising import costs are inflicting increasing pain on Japanese households and domestic-oriented firms, raising questions about the central bank's stance that the weak yen is beneficial to the economy overall. USD/INR movement The USDINR pair made a gap up opening at 77.7900 and traded within the range of 77.7850-77.8700. The pair closed the day at 77.8325 levels. The USDINR pair rose and touched its life time high levels today amid broad dollar strength. Elevated crude oil prices, FII outflows and surging US yields too kept the Indian rupee under pressure. The domestic Industrial output grew by 7.1% in April on better performance by power and mining sectors, as per government data released today. Global currency updates The annual pace of inflation in the US rose to 8.6% in May according to the latest Consumer Price Index data released by the US Bureau of Labour Statistics. The inflation print was above the expected reading of 8.3%. The Dollar index remained strong and rose above 104 levels after the release of higher than expected inflation print. The effect of broad dollar strengthening was seen in both the currencies as the Euro and Pound weakened and traded at 1.0524 and 1.2385 levels respectively. Bond market Short-term U.S. Treasury yields popped today, after the release of hotter-than-expected inflation data. The 2-year rate jumped more than 8 basis points to trade above 2.9%. The benchmark 10-year Treasury yield briefly rose and traded at 3.05%. Short-term rates moved more due to their higher sensitivity to Federal Reserve rate hikes. India 10-year benchmark bond yield too closed the day higher at 7.519%. Equity market Indian equity benchmarks Sensex and Nifty 50 suffered sharp losses following a gap-down start, as rate hike guidance from the ECB and upcoming US inflation data unnerved investors globally. Losses across sectors pulled the headline indices lower, with financial, IT and metal shares being the biggest drags. Broader markets also bore the brunt of overall weakness on the Street. The Nifty Midcap 100 and Nifty Smallcap 100 indices fell around one percent each. Evening sunshine "Focus to be on the ECB President Lagarde Speech due later today." European stocks fell further as investors reacted to the European Central Bank’s latest policy decisions and a hotter-than-expected U.S. inflation print. U.S. stock futures turned lower after fresh data showed that inflation accelerated in May. Heightened inflation is likely to put pressure on the Fed to lift interest rates quickly in an effort to temper rising prices. Fed officials are largely expected to raise the central bank’s key interest rate by half a percentage point next week and replicate that in July. Focus to be on the ECB President Lagarde Speech due later today.

Summary The Consumer Price Index increased 1.0% in May, topping consensus expectations for a 0.7% increase and our own forecast for a 0.8% gain. Inflationary pressures were seen nearly everywhere. Energy prices surged, led by a 4.1% increase in gasoline prices, while grocery prices increased 1.4% and pushed the year-ago rate to a pace not seen since the 1970s. Core goods inflation had shown some signs of slowing over the past few months, but this trend largely reversed course in May. Core goods prices increased 0.7%, led higher by apparel and vehicles. Core services inflation rose at a similar pace and with broad-based drivers including surging airfare prices and solid gains in shelter costs. Simply put, inflation remains far too high for the Federal Reserve's liking. Until inflation is demonstrably on the downswing, we expect the FOMC to fight back aggressively with tighter policy. Another 50 bps rate hike is all but assured at next week's FOMC meeting, and a couple more 50 bps hikes in July and September seem highly likely. Across the board pain The "clear and consistent" progress Fed officials are looking for on inflation remains elusive. The Consumer Price Index rose 1.0% in May, pushing the year-over-year rate to a fresh high of 8.6%. What's more, the worst prints are yet to come by our estimations. We suspect that the formidable momentum in inflation could push the headline rate for CPI close to 9% as early as next month. If that's not bad enough for consumers and the Fed, CPI inflation is likely to stay near those levels through the autumn. The pushback in timing on "peak" inflation comes amid a further climb in energy prices. Gasoline prices rose 4.1% in May but have since catapulted to just shy of $5 per gallon nationally which points to an even larger monthly gain in June. Utility bills are also on the rise. Costs for energy services (electricity and piped gas) increased 3.0% in May and are likely to climb further amid the steep rise in natural gas prices and still unseasonably-low inventories. Meanwhile, food inflation remains unrelenting. Grocery prices shot up another 1.4%, bringing the one-year rise to 11.9%–a rate unseen since the 1970s. Prices for food away from home did not increase quite as much but were still up a robust 0.7% in May. Download The Full Economic Indicator

The dollar accelerated higher after US inflation data on Friday and hit the highest in three weeks. Much hotter than expected inflation fueled expectations for more aggressive Fed in coming meetings, although the central bank already showed its hawkish stance and readiness to use all available tolls to bring soaring prices under control. From the technical point of view the picture remains firmly bullish, as today’s rally surged through  key Fibo resistance at 103.61 (61.8% of 105.04/101.29 bear-leg) and also cracked the next level at 104.16 (Fibo 76.4%), 14-momentum is in stee=p ascend in the positive territory and rising thick daily cloud continues to underpin the action. Also, the index is on track for strong weekly gains (around 2%) and completed reversal pattern on weekly chart, signaling that 105.04/101.29 corrective pullback is likely over. Short-term outlook remains bright for the greenback, as inflation is expected to remain red-hot for some time (until Fed’s measures start to give results) and geopolitical uncertainty over the Ukraine crisis will continue to boost demand for safe-haven dollar. Overbought conditions suggest bulls would face headwinds on approach to key barrier at 105.04 (2022 high) with limited dips to offer better buying opportunities. Res: 104.68; 105.04; 105.93; 106.48 Sup: 103.92; 103.61; 103.17; 102.94

In today’s Traders Edge Market Briefing, Tomasz found these amazing setups that we thought you’d find interesting.

FOMC meeting – 15/06 – as we look ahead to another Federal Reserve meeting it will surprise no-one that the Fed will be raising rates by another 50bps this week to 1.5%, to be followed by another 50bps next month. This month also sees the start of the balance sheet reduction program starting with $47.5bn, rising to $95bn a month after 3 months. In recent weeks, the debate has shifted from the certainty of 50bps rate hikes in June and July and has moved towards the prospect of another 50bps in September.  A number of Fed policymakers have indicated they want to see the Fed funds rate back to neutral by the end of this year, with a consensus of around 2.5%, however there is still some divergence where the neutral rate actually is. Kansas City Fed President Esther George has suggested 2.5% as a starting point, while St. Louis Fed President James Bullard put it lower earlier this year at 2%, while calling for rates to rise to 3.5% by year end. Atlanta Fed President Raphael Bostic also appears to be in the camp of a lower neutral rate of between 2% and 2.5% while also floating the idea of a hiking pause in September. Whether we see a pause in September is likely to depend very much on the inflation outlook, with the latest surge in May CPI making that prospect much less likely, which means that all the talk of a 50bps move post Jackson Hole is unlikely to diminish. Much will depend on how the Fed sees fit to update its inflation forecasts which are still well below current levels. In March, the FOMC upgraded their inflation forecast for 2022 to 4.3% from 2.6%, and in 2023 to 2.7% from 2.3%, while downgrading GDP to 2.8% in 2022 and 2.3% in 2023. A further upgrade to the inflation outlook is likely to be considered hawkish, while leaving it unchanged might suggest that the Fed’s concerns over rising prices are diminishing.       Bank of England decision – 16/06 – the Bank of England has raised rates at every meeting this year, and with headline inflation now at 9% it’s hard to see how they won’t raise rates by 25bps again when they meet later this week. When they met in May three policymakers pushed for a 50bps hike, while the economic forecasts painted a dire outlook for the second half of the year. While this year’s GDP forecast was left unchanged at 3.75%, despite a predicted Q4 contraction of around 1%, the bank revised its 2023 GDP forecasts down to a -0.25% contraction. The MPC also predicted that inflation would start to fall back to target in around 2 years. Another rate increase this week became more likely after the announcement last month of another fiscal aid package, which should go some way to helping support the economy over the course of the rest of the year. We can probably assume that Haskel, Saunders and Mann will vote to hike given they voted for 50bps in May, which means that we only need to see two more members to join them. The bigger question is whether the MPC will go further in their determination to ramp down on future inflation expectations in a fashion similar to the Federal Reserve who have become much more hawkish in recent weeks. Bank of England governor Andrew Bailey has gone to great lengths in recent months to insist there is little the central bank can do about supply chain problems, which is true, but it’s not something the central bank should be admitting. Another communications failure on his part. He still has a responsibility to focus on what the MPC can do, namely inspire confidence that the central bank won’t hesitate to act to underpin inflation expectations, as well as put a floor under the pound’s 10% decline against the US dollar in the past 12 months which has done so much to exacerbate the inflationary impulse hitting the UK economy. Simply proclaiming that it’s not the Bank of England’s fault that inflation is so high is simply not good enough, and also complete nonsense to boot, and runs contrary to the available evidence, which as far back as November last year pointed to the fact that the Bank of England was being complacent about inflation risk. We can expect to see a 25bps move, but we really ought to be matching the Fed with a similar 50bps move.   Bank of Japan decision – 17/06 - the Bank of Japan has set itself apart from other central banks by pledging to keep rates low despite rising inflationary pressures. The decline in the Japanese yen year to date reflects this policy of neglect on the part of the central...

Summary United States: Prices Push Higher in May, Signaling Little Immediate Relief for Consumers Consumer price inflation continued to push higher in May, with the consumer price index rising more than expected and lifting the annual rate of inflation to a fresh 40-year high. Consumers continue to feel the pinch of higher prices, evident in the persistent deterioration in consumer sentiment. To date, households have demonstrated uncanny staying power in the face of inflation, but with little signs of immediate relief from prices, this will only become more challenging. Next week: Retail Sales (Tue), FOMC Rate Decision (Tue), Housing Starts (Wed) International: European Central Bank Readies Rate Hike as Reserve Bank of Australia Delivers The European Central Bank (ECB) took another step this week on its path of policy normalization at its latest monetary policy announcement. The ECB said it intends to raise rates by 25 bps in July, perhaps by an even larger amount in September, and deliver a steady series of rate hikes over time. The Reserve Bank of Australia surprised markets with a larger-than-expected 50 bps rate increase, which we expect it will follow up with another 50 bps hike at its July announcement. Next week: U.K. GDP (Mon), China Retail & Industrial Activity (Wed), Australia Employment (Thu) Interest Rate Watch: SNB and BoE Hold Policy Meetings Next Week We expect the Swiss National Bank to remain on hold next week, but we look for it to commence a tightening cycle later this year. We expect the Bank of England to hike rates by 25 bps on Thursday. Credit Market Insights: Consumer Credit Is Up, Household Net Worth Is Down Consumer credit had yet another strong month in April rising $38.1 billion, a near-record increase bested only by the prior month's unprecedented surge. Meanwhile, household balance sheets slipped in the first quarter as household net worth declined for the first time since Q1-2020, when COVID initially struck. Topic of the Week: Budget Deficit Shrinks...For Now Fiscal year 2022 is now nearly three-quarters complete, and the federal budget deficit has narrowed significantly. Our current forecast is for the federal government to incur a budget deficit of $900 billion in FY 2022. If realized, this would be a smaller deficit than the one that prevailed before the pandemic. Download the full report here

The coming week is loaded with central bank meetings to shake things up in the FX arena. Fed officials are almost certain to raise rates by half a percentage point, so markets will be driven mostly by their future projections. The Bank of England could also lift rates but strike a cautious tone. Nothing is expected in Japan, while Switzerland might disappoint those looking for immediate action.