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Gold Prices Rise on Softer US Dollar, but Fed Rate Hike Bets and Inflation Bets Pose Risks to XAU

Gold Prices Rise on Softer US Dollar, but Fed Rate Hike Bets and Inflation Bets Pose Risks to XAU

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Gold, XAU/USD, Inflation Forecast, Breakevens, Technical Forecast - TALKING POINTS

  • Gold prices are trading slightly higher as a risk-on APAC session weighs on the US Dollar
  • A pickup in inflation bets has bolstered XAU prices, but Fed rate hike bets present a risk
  • XAU/USD’s technical posture looks strong above the 26-day EMA,38.2% Fib retracement
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Gold prices are moving higher alongside equities through the Asia-Pacific trading session. A risk-on move that started overnight on Wall Street is holding firm. Australia’s trade surplus in June, released this morning, beat analysts’ expectations, rising to A$17.7 billion versus A$14 billion. The strength in Australia’s exports suggests that the Asia-Pacific region’s economy, including China, may be more resilient than previously thought.

The upbeat economic data is helping to support the Aussie Dollar, keeping weight on the US Dollar DXY Index. The Greenback remains positive on the week, but prices began to ease during New York trading when a positive US ISM services sector gauge beat expectations, causing traders to dial back recession bets. A weaker Dollar makes gold more attractive to investors outside of the United States.

However, Federal Reserve rate hike bets picked up slightly amid easing recession woes. Rate traders are pricing in a 50% chance for a 75-basis-point rate hike at the FOMC’s September meeting. That would typically be bearish for bullion, but traders see a strong economy supporting prices. Breakeven rates—a market-based gauge of forward inflation expectations, measured by the gap between nominal and inflation-indexed yields—stopped falling in mid-July. Since then, the 1-, 2- and 5-year breakeven rates have increased.

Gold is a common inflation hedge. The fact that price growth expectations have edged up somewhat following months of decline helps to explain the yellow metal’s strength. The chart below shows this relationship. That may see XAU rise further, assuming the recent trend holds. However, if Fed rate hike expectations increase, it would likely pressure breakeven rates and drag gold lower.

gold vs breakeven rates, fomc, fed, gld

XAU/USD Technical Outlook

XAU/USD is trading around 0.25% higher, putting gold prices in positive territory for the week. Prices may rise to the 1788.03 August swing high set earlier this week. That level was quickly sold on an intraday basis, with prices finishing lower on the daily candle. Bulls may face resistance trading into that intraday candlestick wick.

However, the 1800 psychological level will shift into focus if prices pierce above 1788.03. Alternatively, the rising 26-day Exponential Moving Average (EMA) and 38.2% Fibonacci retracement level may underpin prices on a move lower. However, a drop to the 23.6% Fib at 1727.83 may manifest if prices crack below the EMA and Fib.

XAU/USD Daily Chart

xau, gld, chart

Chart created with TradingView

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--- Written by Thomas Westwater, Analyst for

To contact Thomas, use the comments section below or @FxWestwater on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.