Gold, XAU/USD, Fed, Powell, Inflation Expectations, Russian Energy, Crude Oil - Talking Points
- Gold prices catch a bid as Brent oil prices surge higher, inflaming inflation expectations
- Fed Chair Powell firms up rate hike bets, pushing the US Dollar and Treasury yields higher
- Bullion prices likely dependent on oil prices in short-term as EU mulls Russian energy ban
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Gold prices caught a bid overnight despite rising Treasury yields and a stronger US Dollar. The strength is largely attributable to the sharp increase seen in crude oil prices, which drove inflation expectations higher. That increase came amid an increasing appetite among EU members to cut off Russian energy exports. The move would see the 27-member bloc join the United States and the United Kingdom in banning Russian energy products.
US breakeven rates – a market-based inflation gauge – rose as Brent crude oil prices surged more than 7% overnight. Russia’s assault on the port of Mariupol has European lawmakers looking for a strong response, but Germany has expressed concern, citing its reliance on Russian energy. The proposed move to ban exports will likely see further discussion this week as US President Biden tours through Europe. However, oil prices are likely to have an outsized impact on inflation expectations – and in turn gold – for the time being.
Alternatively, the yellow metal’s upside may be capped by Federal Reserve policy speculation. Prices likely would have risen further today if it wasn’t for hawkish commentary from Fed Chair Jerome Powell. Mr. Powell stated that the central bank is ready to hike by more than 25 basis points, if appropriate. The chance for a 50bps increase at the May FOMC meeting jumped on the comments, and overnight index swaps (OIS) moved to price it in. Treasury yields responded accordingly, with the 10-year note’s rate climbing to its highest level since May 2019.
Bullion’s directional bias will likely be guided by the perceived ability and willingness of the Fed to tamp down inflation. If the market sees policymakers falling behind the curve, that will likely further inflame price growth expectations and push gold higher. The opposite is also likely to be true: if the Fed is seen taking a more aggressive approach, that would likely be bearish for gold. That said, oil prices and how they respond to EU policymakers’ rhetoric on banning Russian energy exports are likely to be the largest driver in the short term. Since crude appears to be one of the most poignant drivers of inflation expectations, bullion traders would be wise to keep tabs on its direction and the conflict in Ukraine overall.
Gold Technical Forecast
Gold prices pushed above the 61.8% Fibonacci retracement level overnight but failed to pierce above the 20-day Simple Moving Average (SMA). A drop below that Fib level could see prices test the psychological 1900 level. Alternatively, bulls need to overcome the 20-day SMA before looking higher, although prices remain more than 6% lower from the March high at 2070.42.
Gold Daily Chart
Chart created with TradingView
--- Written by Thomas Westwater, Analyst for DailyFX.com
To contact Thomas, use the comments section below or @FxWestwater on Twitter
