Gold Could Drop Friday As It Plays Catch-Up To Strong U.S. Dollar

Thursday July 4, 2013 11:18 AM

(Kitco News) - Gold could be hit with some selling pressure on Friday as it catches up with renewed dollar strength on Thursday.

U.S. markets were closed on Thursday in recognition of Independence Day but that has not stopped the U.S. dollar from building momentum in Europe as a result of dovish stances from the European Central Bank and the Bank of England.

Both the ECB and the BOE left rates unchanged; however the European Central Bank took the unprecedented move to provide forward guidance, which some analysts are interpreting the shift as a looming rate cut.

"…by explicitly suggesting in the opening remarks that rates could be cut, essentially doing the unthinkable for the ECB and precommitting, the ECB made clear that the rate expectations curves for the ECB needed to be flatten," said analysts from TD Securities. "We still do not expect the ECB to cut rates, at least not over the coming few months if the data continues to keep with its improving trend."

Thursday was Mark Carney's first meeting in his role as the new governor for the BOE. Although he said he wanted to take time to assess the country's economic situation, the central bank's statement did say that the recovery remains weak and that rising interest rates could hamper the country's recovery efforts.

The bank also went on to say that they are considering adopting forward guidance for the next meeting.

The pound dropped 200 points against the U.S. dollar following the release of the BOE's statement.Following ECB president Mario Draghi's press conference, the euro lost more than 100 points against the greenback.

However, the strong U.S. dollar did not impact gold prices . As of 10:54 a.m. EDT spot gold was trading at $1,248.40 an ounce, down $4.10 on the day.

Colin Cieszynski, senior market analyst at CMC Markets, said that his is not surprised gold, and commodities in general, have not reacted to the stronger U.S. dollar as the U.S. is closed; however, there is potential for gold to move lower on Friday ahead of the U.S. employment report.

Cieszynski added that today's stronger U.S. dollar does highlight an increased risk that if employment numbers are relatively in line with economists' expectations, gold could see significant weakness.

"I would expect to see some catch up tomorrow and it will be important to pay attention to the employment numbers," he said.

Neil Mellor, currency strategist at the Bank of New York Mellon, said the ECB meeting highlights the host of negativity that is building up in the eurozone, which will continue to benefit the U.S. dollar and drag down gold prices.

Mellor said there is economic instability in both Portugal and Italy as well as weaker growth expectations in Germany. He added that these problems will force the ECB to remain "accommodative" while the U.S. continues to see some modest economic improvement.

"You can't argue against the fundamentals. The U.S. has an economy that is clearly building momentum," he said.

"It's not going to be a straight 45 degree move but I think the trend for stronger U.S. dollar is in place," he added.

Although gold could lose out against the U.S. dollar, Cieszynski said the precious metal could make some significant gains against the euro as the political turmoil continues to grow.

"We have seen gold quietly move up against the euro," he said. "Things seemed to be improving but now it looks like the wheels are starting to fall off."

Read the latest news in gold and precious metals markets at Kitco News.

By Neils Christensen of Kitco News

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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