Gold Price Analysis: XAU/USD struggles near $1,750 despite USD weakness

  • Gold has been recovering in a weaker USD environment. 
  • Precious metals remain at the mercy of the market’s pricing of the Fed.

Update:Gold prices attempt to revive above $1,750 on dollar weakness amid falling US Treasury yields. The US Dollar Index (DXY), which measures the performance of the greenback against a basket of six rivals retreats sub 93.00 level. The US Inflation data eased in July at 5.4  in line with market expectations of 5.3%. The cooling inflation US soothes investor’s concerns about early Fed tapering. Lower Treasury yields and a softer dollar aids the reprieve in the precious metal. Gold’s has been struggling since Friday’s stronger-than-expected US jobs report for July, which fuels bets that the Fed could move more quickly to taper the monthly stimulus of $120 billion, it has been providing to the pandemic hit the economy. The concerns on the spread of the delta variant keep the downside limited for gold prices.

At the time of writing, XAU/USD is trading at $1,750 and flat on the day in the consolidation of the overnight bid. 

US bond yields and the US dollar fell after US July core inflation was not quite as strong as expected. 

US CPI inflation in July was 0.5% (vs 0.5% expected, 0.9% prior), for an annual pace of 5.4% (5.4% prior).

Core inflation (ex-food and energy) slightly undershot expectations at 0.3% (vs 0.4% expected, 0.9% prior), for an annual pace of 4.3% (4.5% prior).

As a consequence gold was let off the hook, if only for the meanwhile as markets consolidate the recent volatility surrounding the central bank narrative.

The yellow metal rose strongly as US inflation moderated, easing fears the Fed would pare back stimulus measures. 

”While the prices paid by consumers met economists’ projections, the wider market felt it wasn’t enough to force the hand of the Fed to start tapering asset purchases,” analysts at ANZ Bank explained.

”While showing some moderation from June, the pace remains strong,” analysts at Westpac argued, adding:

”The surge in airfare and vehicle prices appears to have peaked, but many other components are showing persistent strength.

For an alternative core inflation measure, the Cleveland Fed trimmed-mean CPI was up 3.0%year, versus 2.9%year in June and 2.1% end-2020.”

As a result, 2-year government bond yields fell from 0.25% to 0.22% and 10-year government bond yields dropped from 1.37% to 1.33%.

Meanwhile, Fed speakers were loud and clear yet again that progress has been made such that tapering should be announced, 

Kansas City’s George who is a voter and known hawk advocated for the same.

George said ”it is time to start normalising policy, in a transition to more neutral settings”, noting that there has been a string of “pretty good” employment numbers.

Additionally, she said that an above 2% pace of inflation may have been achieved, noting price expectations are firming.

Richmond’s Barkin who is also a hawk and voter agreed that the FOMC is “closing in” on QE tapering and he would favour that as he wants to return to a “normal environment as quickly as the economy allows.”

Meanwhile, such a hawkish backdrop is going to be a headwind for gold prices.

”The yellow metal’s persistent underperformance against melting real yields continues to point to a lack of investor appetite,” analysts at TD Securities argued.

”Shorts have held bloated position sizes, which could also hint that short-covering and profit-taking have had a part to play in the recovery off the lows. Nonetheless, CTA trend followers are likely to continue growing their shorts in coming sessions, adding further selling pressure as the market looks for a bid.”

For the day ahead, the July PPI will offer insight into whether upstream price pressures are showing signs of easing (market f/c: 0.6%).

”Initial jobless claims for the week ended 7 August should print around 375k, with labour shortages and the cessation of unemployment benefits to accelerate the downtrend,” analysts at Westpac also said. 

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