Gold has continued to weaken after reversing on Friday as the greenback found support on the back of comments from the Fed’s Christopher Waller. In addition to a stronger dollar, gold has also been held back by a sell-off in government bonds, causing bond yields to rise, which, in turn, has undermined zero-yielding assets like gold and bitcoin. While the metal may well extend its drop in the short-term, my longer-term gold outlook remains positive. I therefore envisage a rise to a new record high soon.
- US dollar and bond yields extend rise
- Gold’s fall back below 2K means bulls have lost some control
- Long-term outlook remains bullish
Gold hit by rising Fed May rate hike bets
The odds of a 25-basis point Fed rate hike in two weeks' time has increased, while traders are also pricing out the risks of a severe recession. This is thanks to the release of mixed bag US data. Last week saw March retail sales print -1% against a forecast of a smaller decline, while CPI (5% y/y) and PPI (2.7%) both came in lower than expected. However, consumer sentiment improved more than expected, adding to the stronger non-farm jobs report from the week before – the week when almost all other employment indicators had disappointed expectations. At the start of this week, we have seen the Empire State Manufacturing Index come out better than expected at 10.8 vs. -17.7 eyed, providing additional support for the dollar.
This week, there is not much in the way of key data on the US economic calendar to impact gold and the dollar. Consequently, I doubt that there will be much follow-through in the dollar’s recovery. Like many other central banks, the Fed is nearing the end of its rate-hiking cycle. It looks like a final 25 basis point rate hike is priced in for May. The Fed will then likely hit the pause button to assess the impact of the past rate hikes.
Gold outlook: Positive
While there is certainly room for this correction to extend in the short-term, the longer-term outlook remains positive for gold. The metal has recently reached a new record high against all other major currencies except the U.S. dollar. It is only a matter of time before XAU/USD also reaches a fresh all-time high, in my view. The fact that major central banks are at or near the peak, this means that interest rates will fall back going forward and thus keep gold’s appeal intact as a haven asset.
What about the immediate term?
Given gold’s failure to hold the breakout, gold traders looking for opportunities on the long side will now want to see the metal print a bullish reversal signal. This could be in the shape of a candle formation like a hammer, or another key reversal pattern. But it is essential that we see this potential bullish reversal signal first before turning tactically bullish on XAUUSD again.
-- Written by Fawad Razaqzada, Market Analyst