• Gold prices suffered their worst weekly loss in months, likely to remain bearish while trading below $1,975.
  • A strengthened US Dollar and higher yields weighed on the yellow metal.
  • Key events next week include the FOMC minutes and US PCE inflation data.

Gold not only lost the $2,000 level during the week, but it also broke through the key support area at $1,970. After declining by over $60 in three days, it stabilized and found support above $1,950. The move lower was driven by a rally in the US Dollar and higher government bond yields. As a result, the yellow metal reached its lowest level in six weeks, extending the correction from its record high level struck in May.

What happened last week?

In terms of economic data, the most significant report in the US was the April Retail Sales, which showed a 0.4% monthly gain, falling below the market consensus of 0.8%. However, the details of the report were mostly positive. The negative surprise came on Monday with the NY Empire Manufacturing Index tumbling from 10.8 to -31.8. However, this was later offset by the Philly Fed Manufacturing Index, which jumped from -31.3 to -10.4 in May. Jobless Claims showed improvement from the previous week. Overall, the data came in strong.

The debt ceiling drama continues to be a relevant factor in the markets. Following a meeting between US President Biden and lawmakers, a deal appeared more likely, which helped boost risk appetite. Surprisingly, the risk-on flows did not weaken the US Dollar, as is often the case.

A key factor driving Gold prices lower was the surge in government bond yields, both in Europe and the United States. The US 10-year yield rose for five consecutive days, climbing from 3.45% to 3.70%, the highest level in two months. Similarly, the UK 10-year Gilt rate soared to 4.05%, the highest since November, while the German 10-year Bund yield advanced toward 2.50%. These significant increases in yields weighed on Gold prices.

The move in Treasuries was prompted by a decline in expectations of rate cuts from the Federal Reserve by the end of the year. Strong economic data, hopes of a debt-ceiling deal, and comments from FOMC members led to a reevaluation of monetary policy expectations. As a result, the odds of a rate hike at the June meeting increased significantly. According to the CME FedWatch Tool, the probability of a hike in June is currently at 37%, compared to 15% a week ago.

Comments from Fed officials contributed to the reassessment of potential steps from the central bank. Several members sounded hawkish, keeping the door open to further tightening. While the market still expects a pause, the hawkish narrative has had an impact.

Next week: FOMC minutes, Fed talk, debt ceiling drama and consumer inflation data 

Regarding economic data, the crucial number next week will be the US April Core Personal Consumption Expenditures Price Index, the Fed's preferred inflation gauge. The number is due out on Friday and is expected to show a monthly increase of 0.4% and a rise in the annual rate from 4.6% to 5%. Such a scenario would indicate that the battle against inflation is far from over. The combination of strong activity data and still elevated inflation would likely keep the Fed on the hawkish side.

Evidence of an acceleration in inflation could be significantly negative for Gold, as it would increase the odds of more rate hikes from the Fed. However, bad news for the US economy could be good news for Gold next week.

The FOMC minutes will be released on Wednesday. Since the May 2, 3 meeting, there has been a lot of talk and speculation, so the minutes could be old news. Nevertheless, it is still an event to take into account that could offer some surprises. 

The debt ceiling saga will continue to make headlines until a deal is reached. The lack of an agreement and a potential US default is an unimaginable scenario due to its dramatic consequences. Hopes of a deal increased recently, but as of now, there is still no bill ready to be voted on.

Gold price technical outlook

The sharp decline in Gold has sent the price below key technical support areas. The current configuration suggests that the decline may not be over, and the correction from record high levels has more room to go.

On the weekly chart, the Relative Strength Index (RSI) has turned south, moving away from 70, and Momentum is also heading south. The immediate support for Gold is at the $1,950 area. A break below this level could trigger more losses, exposing a strong support range delimited by an uptrend line and the 20-week Simple Moving Average (SMA) between $1,920 and $1,930. A weekly close below that area would indicate more weakness ahead. However, if Gold holds above that level, it could set the stage for a rebound.

Recovery above $1,975 would alleviate the bearish pressure in the short term. A daily close above $2,005 is needed to strengthen the outlook for the yellow metal, while a weekly close surpassing $2,020 will lay the ground for new record highs.

Gold price forecast poll

FXStreet Forecast Poll points to a slightly bearish bias in the short term with the one-week target aligning just below $1,950. The majority of polled experts see a rebound later in Gold, and retaking $2,000 by July. 

 

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