XAU/USD May Fall as Markets Pivot Back to Inflation Woes

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Gold Fundamental Forecast – Bearish

  • Gold prices lost upside momentum this past week as the US Dollar rallied
  • Solid non-farm payrolls report underscored the Fed’s economic confidence
  • Crude oil prices and May’s US CPI report may keep XAU/USD pressured

Gold prices were unable to find further upside momentum this past week. In fact, the precious metal was mostly little changed. Broadly speaking, XAU/USD saw its downtrend since March pause in the middle of May, climbing as much as 3.11% before trimming gains. Is the yellow metal losing its uphill battle, readying to resume the broader downtrend?

The road ahead remains challenging for gold, with the downtrend pause likely a sign of profit-taking or consolidation as markets often do not move in straight lines. In May, traders seemed to pivot from inflationary woes to recessionary ones. That resulted in the markets significantly trimming 2023 Federal Reserve rate hike expectations.

That is as odds of a 50-basis point rate hike in September dwindled. As a consequence, Treasury yields and the US Dollar weakened. When these assets are moving in the same direction, in this case downward, that tends to bode well for gold and vice versa. But, this past week, we saw the Fed remain confident about the economic outlook and undermine expectations of a pause in September.

As a result, bond yields are back on the rise and the US Dollar could be pivoting back higher. This past Friday, another solid non-farm payrolls report crossed the wires, underscoring the central bank’s confidence. Unsurprisingly, gold turned lower as the US Dollar climbed and Treasury rates rallied. As such, it is looking to be more rough times ahead for XAU/USD.

All eyes in the week ahead are on May’s US CPI report. Headline inflation is still expected to remain at 8.3% y/y, the same as in April. The core gauge, which excludes volatile food and energy prices, is seen slowing to 5.9% y/y versus 6.2% prior. With crude oil prices at their highest since early March, inflation seems unlikely to go away for now. As such, a strong USD and higher bond yields may continue working in tandem to sap gold’s appeal.

Gold Versus US 10-Year Real Yield – Daily Chart

Chart Created in TradingView

— Written by Daniel Dubrovsky, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

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