Gold Prices Forecast: Rising Yields, Fed Stance on Inflation Weigh on XAU/USD

Gold Prices Tumble as U.S. Treasury Yields Rise

Gold prices dropped sharply on Wednesday, pressured by rising U.S. Treasury yields and a stronger dollar. Investors are also preparing for a crucial inflation report later this week, which could provide insights into the Federal Reserve’s policy path. On May 20, gold prices hit an all-time high of $2,449.89.

At 10:42 GMT, XAU/USD is trading $2345.73, down $15.66 or -0.66%.

Impact of Rising U.S. Treasury Yields

The yield on the 10-year U.S. Treasury note rose for the second consecutive day, reaching over 4.566% early Wednesday, while the 2-year yield climbed to 4.958%. The dollar index also gained 0.1%, making gold less attractive as higher yields tend to reduce the appeal of holding non-yielding bullion. A weak auction for $70 billion worth of 5-year notes further contributed to rising yields, with the bid-to-cover ratio coming in at 2.3, below the 10-auction average of 2.45.

Federal Reserve’s Stance on Inflation

Investors are closely watching the upcoming personal consumption expenditures (PCE) price index, the Fed’s favored inflation gauge, due on Friday. Federal Reserve officials, including Minneapolis Fed President Neel Kashkari, have emphasized the need for “many more months of positive inflation data” before considering rate cuts. The minutes from the last Fed meeting revealed uncertainty about the outlook for rate cuts, reinforcing the cautious stance.

Market Reactions and Expectations

The mixed economic data has led markets to price in only 34 basis points of rate cuts for the year, compared to the 150 basis points anticipated at the start of 2024. Consumer confidence data released on Tuesday showed unexpected improvement, but concerns about inflation and higher interest rates persist. Markets are also focused on upcoming inflation reports from Germany and the euro zone, with the U.S. core PCE report being the main event on Friday.

Geopolitical Tensions and Gold’s Safe-Haven Appeal

Despite ongoing geopolitical tensions in the Middle East, gold has struggled to maintain its safe-haven status. The hawkish rhetoric from Fed officials has led traders to scale back expectations of rate cuts, impacting gold prices. According to the CME FedWatch tool, there is now a 46% chance of a rate cut in September, reflecting the market’s cautious outlook.

Market Forecast

Given the current market conditions, gold is likely to face further pressure. If the PCE data on Friday comes in higher than expected, it could solidify the prospects of higher-for-longer U.S. rates, potentially forcing spot gold to retest the $2,300 support level. The bearish sentiment is reinforced by the Fed’s emphasis on inflation control, suggesting limited room for rate cuts in the near term.

Technical Analysis