Gold prices took a hit on Wednesday as the US Dollar strengthened, driven by the surge in US Treasury yields, ahead of the upcoming release of the Personal Consumption Expenditures (PCE) Price Index report on Friday. This decline in gold prices was a result of investors starting to anticipate less easing by the Federal Reserve (Fed), which supported the rise of the US Dollar. As a result, the XAU/USD pair was trading at $2,301 after reaching a daily high of $2,323.
The US Dollar Index (DXY) reached a new monthly high of 106.13 due to the increase in US yields, with the 10-year Treasury note yield rising by 5.5 basis points (bps) to 4.304%. Fed Governor Michele Bowman suggested that monetary policy would remain unchanged for a while, but she also mentioned the possibility of a rate hike if progress on inflation were to slow down or reverse.
Focus this week is on the Fed’s preferred inflation gauge, the May PCE, which is expected to show a decline from 2.7% to 2.6% year-over-year, with core PCE predicted to be at 2.6% year-over-year, down from 2.8%. Other important data releases include the final reading of Q1 GDP for 2024, Durable Goods Orders, and Initial Jobless Claims.
In terms of market movers, San Francisco Fed President Mary Daly expressed concern about the labor market on Monday, while Fed Governor Lisa Cook mentioned a potential sharp fall in inflation next year on Tuesday. The US economic docket for Thursday will feature the release of Q1 GDP, which is expected to decline to 1.4% quarter-over-quarter, and Durable Goods Orders for May are expected to show a contraction.
Looking at technical analysis, the Head-and-Shoulders chart pattern suggests a bearish bias for gold prices, with the next support level at $2,300. A break below this level could lead to further declines towards $2,277 and $2,222. On the other hand, a move above $2,350 could open up resistance levels at $2,387 and $2,400.
It is important to note that the Federal Reserve plays a crucial role in shaping monetary policy in the US. The Fed aims to achieve price stability and full employment by adjusting interest rates. When inflation is high, the Fed raises interest rates to curb rising prices, which can strengthen the US Dollar. Conversely, when inflation is low or unemployment is high, the Fed may lower interest rates to stimulate borrowing and spending, which can weigh on the Greenback.
Overall, the current market conditions reflect the impact of strong US yields and a rising US Dollar on gold prices, with investors closely watching upcoming data releases and Fed announcements for further guidance on future monetary policy decisions.