Commodities, at large, have traded mixed in the past few sessions as market players assess China's economic health and the US Federal Reserve’s policy stance.
Gold swayed along with the US dollar index. After hitting a high of $1,830 a troy ounce earlier in the week, the metal corrected sharply to $1,750.
Industrial metals were volatile as concerns about Chinese demand were countered by tightening global supply. Crude oil has been relatively stable and benefitted from tightness in the US market due to weather disruptions.
Concerns about the Chinese economy heightened this week amid reports of a rise in coronavirus cases in some parts of the country. This comes after the country’s industrial production and retail sales growth slowed sharply in August.
China's “regulatory measures” against big technology firms, too, have fuelled concerns about the economy.
Fed officials have tilted towards monetary tightening but failed to give clarity on a timeline, forcing market players to turn to economic numbers and central bank comments to gauge the Fed’s monetary policy.
Market reaction has intensified ahead of the Federal Reserve's meeting on September 21-22.
Earlier in the week, the US dollar index fell as US CPI data showed that consumer prices rose at a slower pace in August. Inflation concerns remain high, however, easing price pressure may give the Fed more room to act.
The dollar index rebounded to hit a three-week high, reacting to US retail sales data that rose unexpectedly in August, reflecting the limited negative effect of the recent rise in virus cases.
The US economic outlook remains positive and if there is no major impact of resurgence in virus cases, the central bank could consider starting the bond-tapering process.
While financial markets have swayed in both directions, the reaction to US retail sales data shows that market players are worried about the Fed starting the monetary tightening process soon.
The Fed is not expected to take any measure at its next week meeting but may lay the foundation for tapering in the coming months.
If we look at the last few meetings and comments from Fed Chairman Jerome Powell, the central bank has said tightening will be gradual and rate hikes are not on the cards in the near term.
While the Fed will remain the major factor for commodities, market focus may shift to other central banks as well.
The Bank of England and the Bank of Japan are also due to hold their monetary policy meeting next week. The UK inflation data showed a much bigger than expected rise in consumer price in August, further strengthening the case for monetary tightening. The Bank of Japan has, however, maintained a dovish stance and may continue with the same amid persisting virus risks.
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