Direxion Shares Exchange Traded Fund Trust has been stuck in bear territory in the last four trading sessions of this week because gold has largely lost its shine. The European Central Bank’s decision not to make major changes to its monetary policy on Thursday has strengthened the U.S. dollar. On Thursday, the U.S. dollar index was up 0.05% while the gloomy outlook in the eurozone weakened the Euro.
More so, the U.S. Federal Reserve appears to be committed to raising interest rates next month. The negative interest rates in Europe and a proposed rate hike in the U.S. is dollar-positive and gold-negative because investors will exit the bullion to put their money in assets that pay interests.
A strong U.S. dollar always weakens the prospect of the yellow metal and there’s not much that investors in the bullish camp can do to avert the impending crash in ETFs tracking the yellow metal. However, U.S. labor data due to be released later today might throw some positive surprises that would provide a rallying cry for bulls when the market opens next week.
Gold drags down the ETFs into the mud
Direxion Shares Exchange Traded Fund Trust was down to a session low of $72.04 before closing with 0.73% gains on Thursday but investors wouldn’t be surprised because gold settled at nearly a three-month low during the session. Spot gold was down 0.1% to $1,210.96 per ounce towards the end of the session. Gold for June delivery was down 0.2% to settle at $1,209.80 an ounce to mark the lowest closing price since February 16.
The main reason for the continued weakness in the yellow metal on Thursday was that ECB revealed that it kept its interest rates unchanged while making marginal adjustments in its inflation projections. Now, investors are putting all of their focus on U.S. jobs data due today in order to predict the next move that the Fed will make concerning interest rates.
A strong jobs report could embolden the Federal Reserve to go ahead with its plan to raise interest rates when it meets in June. A weak jobs report however could force the Fed to suspend making a decision on interest rates until after its policy meeting next month.
Julius Baer analyst Carsten Menke provides insight into the relationship between the jobs data and on how investors trade the yellow metal. He says, “People are looking for confirmation whether the likelihood of a summer rate hike is going to increase even further… As long as fears of a summer rate hike are kept alive by the incoming macro data, the odds are much higher that speculators move away from the long side in the gold market.
Range-bound trading to continue until the market moves
The U.S. Federal Reserve triggered the weakness in gold and Direxion Shares Exchange Traded Fund Trust after hinting that an interest rate hike is in the works. It appears that officials are not backing down – MarketWatch reports that Dallas Federal Reserve Bank President Robert Kaplan has maintained that the Fed should not delay in raising interest rates because the economy has improved beyond expectations.
Analysts have also weighed in heavily on how market sentiment is being influenced by the Fed’s action/inaction on interest rates. Analysts at U.S. Bank Wealth Management noted that “Shifting market sentiment toward a Fed rate hike in June or July has lifted the U.S. dollar and pressured gold prices in the month of May. This linkage may continue for some time,”
Rob Haworth, senior investment strategist for U.S. Bank Wealth Management notes that “You’re kind of range bound until you’re clear on what the trend is of the Fed and of the dollar… You don’t have any new news to change your view on Janet Yellen or what the Fed will do, and the big news is the job report tomorrow.”