Gold Prices May Rise if USD Sinks, US Data Fuels Fed Rate Cut Bets

Gold Price Fundamental Forecast: Bullish

  • Gold prices capitalized on dismal US PMI figures as US Dollar sunk
  • XAU/USD may gain in the short-run on more disappointing US data
  • Possibility of US Dollar gains in the medium-term may subdue gold

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XAU/USD Wrap

Gold prices spent most of last week in rather mute trade until a sudden surge of volatility on Thursday sent the precious metal rallying. Looking at the XAU/USD 4-hour chart below, we can see that it rallied at the expense of the S&P 500, US Dollar and local front-end government bond yields. This kind of trading dynamic reflected increased Fed rate cut expectations on a dismal set of US PMI data.

Gold Rises as US PMI Data Sinks USD and Bond Yields

Gold Prices May Rise if USD Sinks, US Data Fuels Fed Rate Cut Bets

Chart Created in TradingView

Gold Week Ahead

Gold’s sensitivity to unison behavior in the Greenback, S&P 500 and bond yields underscores its anti-fiat appeal rather than as a safe-haven asset. The yellow metal has no interest-bearing qualities, which are what typically give currencies their appeal. As an example, last week we saw the Australian Dollar accelerate its depreciation on the buildup of RBA dovish expectations which lead to a 90% probability that we may get a cut in June.

With that in mind and using last week as an example, the impetus for additional gains in gold prices depends mostly on how far Federal Reserve rate cut expectations can go. As a reminder, the central bank has reiterated its data-dependent stance. To that end, there are plenty of opportunities such as US consumer confidence and GDP data to impact the Fed’s outlook on US economic growth prospects. Not to mention that we will also get the central bank’s preferred measure of inflation, core PCE.

The US Citi Economic Surprise Index is negative and has been so since around the middle of February. This does suggest that economists’ are overestimating the health and vigor of the economy, leaving data vulnerable to disappointment in the coming week. Having said that, data in the US has been tending to fall short by increasingly smaller margins since the beginning of this month.

While in the short-run this may support gold, gains in the highly-liquid US Dollar during times of aggressive risk aversion can counter this and should not be discounted. The reason why this is prominent is because of the increase in US-China trade war fears seen as of late. The latter nation seems keener this time around to stand its ground, calling out the other side for leading to the stall in talks with the world’s-largest economy.

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— Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter