The gold market was off to a tough start this morning as the new trading week got underway. Dollar strength was keeping the bulls at bay, and allowing the bears some wiggle room to the downside. Recent data, however, pushed a jump in gold prices that took the metal higher by several dollars on the day. The most recent reading of ISM Services PMI declined to 50.3 in May. This reading was lower than anticipated, and also lower than the April reading of 51.9%. Consensus estimates were looking for a reading of 52.6% for May. The gold market saw a solid bounce off of support in the $1,950 area and is now trading around $1.956.
The data stream may become increasingly important as the next FOMC meeting approaches at the middle of the month. At this point, some feel the Fed is likely to signal a pause in its rate hiking campaign. Others, however, feel the Fed may remain hawkish and could avoid signaling any such pause to higher rates. Whatever the Fed does or does not do, it does have the potential to move markets. Although business conditions may currently be considered stable, there may be increasing concerns over a slowing economy. This slowdown could lead to a recession, and recession has been a worry for some time now. If the Fed elects to take a pause, it could alleviate some of the recession worries. If the Fed decides to stay the course, however, it could exacerbate those worries and fuel a global recession in the months ahead. In reaction to the ISM data, markets are pricing in a very high likelihood of the Fed doing nothing at its meeting next week.
Other areas of the economy are also losing momentum. The employment index fell into contraction territory last month with a reading of 49.2%. Readings below 50 are considered to show contraction while readings above 50 signal expansion. Despite much of the weaker-than-anticipated data in recent weeks, the rate of inflation has been coming down. Inflation remains quite high, however, and is still well-above the Fed’s desired target of 2% annually. With inflation moving in the right direction, it could give the Fed even more reason to consider taking a pause on its hiking campaign. For the time being, the markets will monitor the data stream and try to guess what the central bank will do at its next meeting and at the meetings to follow.
The gold bulls remain in charge on the daily chart. Their control has largely faded in recent weeks, however, as they have failed to maintain a run above the $2,000 level. That remains the next target for the bulls, and a close above it could send the metal sharply higher quickly as momentum players and trend traders jump on board again. The bears will look to take the market below the May lows around $1,950 and then the $1,900 level below.