Gold Price Steadies as US Dollar Under Pressure Ahead of CPI. Where to for XAU/USD?

Gold, XAU/USD, US Dollar, FOMC, Treasury Yields, Real Yields, US CPI – Talking Points

• the gold price You may be at a crossroads with mixed signals
• the U.S. dollar It looks weak, but US Treasury yields are still high
• we CPI This week may provide some directional clues. XAU/willAmerican dollar go ahead?

The price of gold has started the week to hold on to the gains seen on Friday when the US dollar slid lower across the board.

Dollar weakened despite Treasury yields continuing their upward march with the benchmark 10-year note trading near 4.10%, off a low of 3.25% in April.

The policy-sensitive two-year note yielded more than 5.10% last Thursday for the first time in 16 years before dropping to 4.75% on Friday. It is now back above 4.90%.

The bumpy ride was indicative of data points along the way as well as the FOMC meeting minutes which revealed a tighter board than the market had previously imagined.

The interest rate market is now weighing a 25 basis point hike by the Fed on July 26 at over 80% probability.

A possible source of concern for the gold bulls is rising real yields in the US. The real yield is the nominal yield minus the market price inflation rate derived from Treasury Inflation Protected Securities (TIPS) for the same duration.

The adjusted yield on the 10-year Treasury note came in at more than 1.82% on Friday. The last time gold traded at these levels in 2009, spot gold was below $1,000. A higher real yield in Treasuries provides an increased return against the prospect of owning non-yielding assets, such as gold.

Of course, a lot has changed since then, but the US CPI on Wednesday will be watched closely to see if the Fed’s tightening continues to have the desired effect on inflation. A Bloomberg survey of economists is looking for the annual consumer price index to be 3.1% through the end of June, up from 4.0% previously.

The driving force driving real yields higher has been the increase in nominal yields, with inflation expectations looking flat for the time being, as shown in the chart below.

For gold traders, it may be worth keeping an eye on the US yields for clues of potential directional signals.

GC1 (Gold Futures Contract) against 10-year US Treasury note, 10-year inflation rate interval and 10-year real return

Chart created in TradingView

– By Daniel McCarthy, Strategist for DailyFX.com

Please contact Daniel via @tweet on Twitter