A daily closing below $1,930 can open the door to additional losses towards $1,900.
Gold’s volatility may rise based on US Q1 GDP data and March PCE inflation data.
Gold began the week on a bullish note. It reached its highest point in over a month at $2,000 Monday. The financial markets were dominated by risk flows on Tuesday and the yellow metal suffered severe losses. After a consolidation phase of around $1,950 during the second half, XAU/USD was subject to renewed bearish pressure and ended up almost 2% lower on a weekly basis.
What was the story last week?
The Easter Monday trading conditions were so thin that gold rose to $2,000. Despite rising US Treasury bond yields, the greenback managed to hold its ground and make it difficult for XAU/USD not to move higher. James Bullard, President of St. Louis Fed, stated Monday that the Fed may consider 75 basis point rate increases and that the policy rate must rise to 3.5% by year’s end to manage inflation.
European traders returned from a four day holiday on Tuesday, and the global bond selloff picked steam. The yield on the benchmark 10-year US Treasury Bond was within touching distance of 3%. Wall Street’s main indexes soared sharply due to upbeat earnings figures. This also prompted a liquidation of gold positions.
On Wednesday, the yields of the 10-year US Treasury Inflation Protected Securities (TIPS), moved into positive territory during the Asian trading hours. This was the first positive move in over two years. This market development led to gold losing interest in inflation hedges and XAU/USD falling below $1,940. The greenback lost heavily against major rivals, including the euro, during the week, but the pair failed to make a convincing rebound.
The dollar’s strength was boosted by Thursday’s hawkish comments from FOMC Chairman Jerome Powell. Despite the fact that XAU/USD suffered a small loss due to the shift in risk mood, bulls struggled to find the precious metal.
Speaking at the IMF Spring Meetings, FOMC Chairman Powell stated that they plan to bring interest rates to neutral “expeditiously”. Powell confirmed that there will be 50 basis point (bps) rate increases in the future when he was asked about the market pricing. Powell commented on the US economy’s state, noting that the US labor market is still tight but that the economy is very strong.
Global yields rose after Friday’s IMF event. Gold continued its slide, falling to a new two-week low at $1,931. According to data from the US, the S&P Global Composite PMI fell to 55.1 in April, from 57.7 back in March. Although this print was worse than the 58.1 consensus, it had minimal to no effect on the dollar’s market value. XAU/USD lost for the second consecutive day, closing the week below $11,950
Next week
The US economic docket will feature Tuesday’s March Durable Goods Orders and Conference Board’s Consumer Confidence Index. Investors will likely ignore Tuesday’s data ahead of Thursday’s first quarter Gross Domestic Product report.
After the 6.9% annualized growth in the fourth quarter 2021, the markets expect the US economy will expand at an annualized rate 1% in Q1. If the GDP reading exceeds analysts’ expectations, it would confirm that the Fed believes the economy can handle tightening. A disappointing GDP print could lead to the dollar losing interest and open the doors for an XAU/USD rebound.
Market participants will closely monitor Friday’s April inflation data from Eurozone. Earlier this week, several European Central Bank policymakers stated that they are open to raising the policy rate as soon as July. They also suggested that the policy rates could become positive before the end of 2018. While ECB President Christine Lagarde reiterated on Thursday that they will keep “optionality” in the face of increased uncertainty, a stronger than expected inflation reading could drive a rally for EUR/USD. The selling pressure around the dollar will help gold move higher in such an environment.
The US Bureau of Economic Analysis will publish the Personal Consumption Expensions (PCE) Price Index on Friday. This index is the Fed’s preferred indicator of inflation. Core PCE Price Index will drop to 5.3% in March, from 5.4% in February. For a stronger result, a soft PCE inflation figure will support the dollar and gold.
