- Gold price uptrend continues despite shrinking volatility.
- US PCE inflation data on Friday has huge market implications.
- Federal Reserve future rate hike bets are shaping precious metal markets.
Gold price (XAU/USD) continues to trade within a solid uptrend, even in a calmer week in the financial markets. Things could get lively again on Friday as the market gets ready for the biggest data release of the week, the United States Personal Consumption Expenditures (PCE) inflation numbers, scheduled to be released at 12:30 GMT.
US PCE inflation numbers are crucial for Gold investors
US PCE data is the Federal Reserve’s preferred gauge of inflation, and the markets will scrutinize the numbers deeply to start figuring out the chances of another Fed interest rate hike in the next FOMC meeting on May 3. Market expectations for the March numbers are at 4.7% for the yearly core PCE measure, and 0.4% for the monthly change. Any relevant discrepancy from these figures will certainly have an impact on the financial market landscape.
US PCE inflation data consensus and previous numbers (source: FXStreet Economic Calendar)
Such development is crucial for Gold investors, as the bright metal moves the opposite direction to interest rates, which are highly correlated with US Treasury bond yields and the US Dollar. When yields and the Greenback are higher, that diminishes Gold value, as precious metals are yield-less and are priced in US Dollars.
Matías Salord, Senior Analyst at FXStreet, explains how a lower-than-expected PCE release could benefit Gold bulls, by damaging the US Dollar and US T-bond yields:
On the contrary, if the Core PCE eases, it would be great news for the Fed, but not for the Dollar. Signs that inflation continued to slowdown would alleviate the pressure for the Fed to do more. US bond yields could resume the slide and the US Dollar print fresh monthly lows.
Is Gold price capped despite recent rally?
Gold price uptrend has slowed down in the past days, but bulls still keep the edge, with the bright metal comfortably trading above $1,970 at the time of writing.
ANZ Bank strategists have analyzed the current Gold trend, and believe the bright metal is capped as they do expect the Federal Reserve to still hike interest rates one or two more times this year:
“Gold is well supported by US recession fears, easing inflationary pressure and more dovish monetary policy. Nevertheless, the upside looks limited in the near term amid easing banking risks and further Fed rate hikes.”
Gold price: US Treasury bonds, the US Dollar and inflation dynamics
Gold is a non-yielding asset – holding it does not provide regular revenue – so it usually remains negatively correlated with United States Treasury bond yields. The benchmark US 10-year bond yield was constantly on the rise for most of 2022 as a response to the Federal Reserve raising interest rates to combat skyrocketing inflation.
Price pressures remain high early in 2023, but Consumer Price Index (CPI) readings in the US and other big economies have shown signs of slowing down, and economists project this disinflation trend to continue through the rest of the year. A prolongation of this trend should help Gold price regain some footing from the demand side.
Treasury yields are not the only asset to track for Gold price (XAU/USD). The yellow metal is primarily traded in US Dollar terms, which makes it really vulnerable to currency market action. When the USD rallies against other major currencies and becomes the go-to asset, like it has been doing for the most part of the last year, Gold price tends to trend down as well. Of course, US Treasury yields and the US Dollar are highly correlated, so these dynamics are intertwined.
Gold price can target $2,000 on lower-than-expected PCE inflation
Gold is trading within a solid uptrend, making relative highs and lows in several timeframes. Despite the XAU/USD price action having calmed down this week on easing bank fears and a light economic calendar, it found solid support at the 23.6% Fibonacci retracement level from the March 8-17 rally early in the week. Since then, Gold bulls have slowly resumed the uptrend ahead of crucial US PCE inflation data.
Immediate resistance target for Gold bulls is located at the $2,000 round and psychological level, which has acted as a difficult level to break already three times in the last 10 days. That could be reached on a lower-than-expected US PCE release. With the Relative Strength Index (RSI) still short of overbought territory, it adds credence to such a potential rally (always data dependant, of course.)
On the other hand, a higher-than-expected Fed preferred inflation measure could trigger a correction on the bright metal, and immediate support would be right back at the aforementioned 23.6% Fibonacci retracement, located at $1,951.
Gold price daily chart
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