Gold above $1900, but falls from earlier highs on US data

Gold Prices continue to trade higher on Friday amid month-end US dollar weakness, with prices still above $1900. But XAU/USD has pulled back from earlier highs with US yields rallying in wake of the latest US data dump.

Traders’ focus now has switched to next week’s Fed policy meeting, with a 50 bps rate hike expected. Yields rally on US data, pushing gold back from highs

While continuing to trade with healthy on the day gains of about 0.75%, spot gold (XAU/USD) prices have pulled back from earlier session highs near $1920 per troy ounce and are back to trading sub-$1910. In wake of the latest US data dump, US yields have been on the front foot, with 10-year yields now up about 7 bps on the day in the 2.90s% and 2-year yields jumping closer to 10 bps on the day to the 2.75% region.

US inflation as per the Core PCE Price Index moderated a little to 5.2% YoY in March, but there was a larger than expected jump in QoQ growth rate of the Employment Cost Index (ECI) in Q1. The Fed has communicated in recent months that it is watching the ECI closely and the latest numbers will raise fears that high wage growth could make getting inflation back to the bank’s 2.0% target more difficult.

Gold prices are able to shrug off the impact of higher yields given month-end positioning-related weakness in the US dollar. In recent weeks, buck strength has been a key factor weighing on gold – despite a 0.4% drop on Friday, the Dollar Index (DXY) is still on course to post a more than 2.0% gain on the week and roughly 5.0% gain on the month.

That mark’s the best month of gains for index, which is a trade-weighted basket of major USD pairs, since January 2015. A stronger US dollar makes USD-denominated commodities more expensive for purchase by the holders of foreign currency, hence it shouldn’t come as too much of a surprise to see gold on course to end the month about 1.7% lower.

As for why the US dollar was so strong over the last few weeks, market commentators agree on a few factors. These include expectations for aggressive Fed tightening, rising economic and geopolitical risks relating to Russia and its war in Ukraine, risks to the Chinese economy as a result of lockdowns and the broadly downbeat tone to sentiment across risk assets like global equities.

Looking to next week, all of these themes will remain in vogue, with particular focus on the Fed’s policy announcement on Wednesday. A 50-bps rate hike is expected alongside an announcement on quantitative tightening plans, with the bank also expected to signal rates ending the year at around 2.5%, meaning more 50 bps moves at upcoming meetings. This is a recipe for continued US dollar strength, which could cap gold’s ability to recover beyond the low $1900s. Next week’s trading bias looks tilted towards a test of this week’s sub-$1875 lows.