Gold Dropped as Forecasted

4 July, 2017

This is a notable day for several interrelated moves: the fall of the yen, the rise of the dollar, and the drop in precious metals. All these changes resulted to the great results (better than expected) from the Institute of Supply Management (ISM) manufacturing index, which had a huge jump since August 2014. The employment sub-index had a sharp rise, too.

The improvement in the ISM index resulted in fed funds rate expectations to go up sharply, US bond yields to rise and stocks to move higher. Risk-on sentiment took hold and the need to invest on safe-haven assets (like yen or gold) was significantly reduced.

JPY has a further decrease due to Sunday’s election results in Tokyo and the same thing happened to AUD after the Reserve Bank of Australia (RBA) kept rates stable and made no changes. This comes in contrast to the changes from other central banks around the globe that emphasized the gradual return to normal and the need to normalize their policies accordingly. However, the RBA had no reference at all regarding any changes in their policies.

This is expected to be a very quiet day. With the US on holiday (most of them since yesterday) and not much scheduled in Europe, we are not expecting to have any news that will have an impact on the markets.

The only major economic indicator is the UK construction PMI. Investors are predicting a fall and as a result negatively affect the sterling. This is because most people are expecting the Brexit to negatively affect the construction industry- companies will put off new construction plans until they get an idea of what kind of trade deal is going to be negotiated.

In addition, much of the demand for housing in the UK has been driven by new people arriving to Britain, but if immigration is affected due to Brexit then this is likely to diminish as well.

Furthermore, note from the graph that yesterday’s UK manufacturing PMI missed all the expectations.

EU producer prices usually do not affect the market but since nothing else significant is going on, they may have some impact on the market. If there is a sharp fall then this could be negative for the euro.

The construction PMI is quite important for GBP. Eight times in the last year, it resulted in a move of more than 0.1% for cable over both 30 minutes and one hour following its release.

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