Gold, XAU/USD, Inflation, Treasury Yields, Fed, Symmetrical Triangle – Talking Points:
- Gold aimed higher as Treasury yields and the US Dollar fell
- Falling commodity prices may be lowering inflation estimates
- XAU/USD eyes Symmetrical Triangle for next potential move
Gold prices gained on Thursday as the anti-fiat yellow metal capitalized on a weaker US Dollar and falling longer-term Treasury yields. Weakness in the latter followed a brief spike on this week’s FOMC meeting minutes, where officials noted that it could be soon time to discuss tapering policy. That may pose a threat to XAU/USD, which tends to benefit when yields are depressed given it is a non-interest bearing asset.
A reason why the yellow metal may have climbed on Thursday was falling inflation expectations, which drives what investors think the Fed could do. To that end, there was a general decline in commodity prices. Copper is down over 7% from the all-time high on May 10th. Lumber futures are also down, almost 20% from this month’s top. This may be reducing the urgency for the Fed to unwind dovish policy.
The US 5-year breakeven rate fell to its lowest since the end of April yesterday. The breakeven rate is derived by taking the difference between real bond yields and nominal ones of the same maturity. This results in an estimated gauge of inflation that is priced in by markets. So, what might gold be awaiting heading into the weekend?
Eyes are on preliminary Markit US manufacturing and services PMI readings for May. Having said that, persistent dovish commentary from the Federal Reserve could numb a market reaction to an upside surprise in the data. As such, the skew might be for a more aggressive reaction to a softer outcome. That may offer some upside potential for gold if that results in further bond yield declines.
Gold Technical Analysis
On the 4-hour chart, gold seems to be finding itself within the boundaries of a Symmetrical Triangle chart pattern. This is a neutral formation, where the direction of the breakout could precede the next key move. A climb above the ceiling would likely place the focus on 1890 as XAU/USD aims for the 1900 handle. If not, triangle resistance can hold and keep the yellow metal in a consolidative setting.
XAU/USD 4-Hour Chart
–— Written by Daniel Dubrovsky, Strategist for DailyFX.com
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