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Gold Fundamental Forecast: XAU Eyes PCE After US Dollar, Treasury Yields Weigh on Price

Gold Fundamental Forecast: XAU Eyes PCE After US Dollar, Treasury Yields Weigh on Price

Thomas Westwater, Analyst

Gold Fundamental Forecast: Bearish

  • Gold Prices fell last week after yields rose into the weekend after a hawkish FOMC
  • XAU/USD faces a tough path ahead against higher yields, PCE figures in focus

Gold prices fell again last week, although the pace of losses slowed as credit risks broadsided markets. China’s Evergrande Group was the catalyst for sending traders into safe-haven assets. Offshore bondholders reported last week that they failed to receive any coupon payments from the Chinese real estate giant. Investors remain on edge as another round of USD coupon payments approaches on October 11.

Instead of gold, investors favored the US Dollar. Rate traders sold US government debt last week after the Federal Reserve hinted that it would begin tapering balance sheet growth later this year. That FOMC decision led to a steepening of the yield curve, which suggests traders are going along with the Fed’s outlook that rate hikes are eventually coming on the back of stronger economic activity and inflation. The CME Group’s FedWatch Tool sees a 15.6% chance for a 25 basis point rate hike at the June 2022 FOMC meeting. That is up from 9.9% the week prior.

cme group fed tool, rate bets

Source: cmegroup.com

A rise in Treasury yields typically hurts gold prices as It is a non-interest-bearing asset. Moreover, when the yield curve rises, gold prices typically fall – this is due to the yield curve's predictive quality concerning rate hikes and economic activity. Next week brings the Fed’s closely watched inflation gauge, core PCE. Analysts expect the figure to cross the wires at 4.2% on a y/y basis, in line with July’s 4.2% increase.

A miss on the figure may see some rate hike bets pullback, which could allow gold to rise. However, with inflation already well above the Fed’s target, labor market data will offer more relevant information around rate hike bets. That said, Thursday’s initial jobless claims data will come on the radar before the September non-farm payrolls report due out next Friday.

gold price versus 30-year treasury yield

Chart created with TradingView

--- Written by Thomas Westwater, Analyst for DailyFX.com

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

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

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