Gold Prices May Fall as US PCE Data Sends Yields, Dollar Higher

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GOLD TALKING POINTS:

  • Gold prices pressured despite markets’ dovish read on FOMC outcome
  • Upbeat Q1 US GDP data helped drive recovery in Treasury bond yields
  • Strong PCE reading may dovetail with bearish gold price chart setup

Gold prices are under pressure despite the markets’ unmistakably dovish interpretation of the FOMC monetary policy announcement. This is as Treasury yields rebounded, with the rate on the benchmark 10-year note rising to the highest level in two weeks. That undermined the appeal of the non-interest-bearing yellow metal.

While investors initially heeded the US central bank as it talked down tightening bets – Treasury yields fell with the US Dollar and bullion rose – the mood quickly reversed in the hours after the policy announcement. The Greenback stabilized as borrowing costs roared higher and gold fell.

Upbeat US GDP data helped encourage more of the same. An initial look at first-quarter growth showed the economy expanded at an annualized rate of 6.7 percent, topping baseline forecasts. That helped pull up medium-term (5-year) inflation expectations priced into bond markets to a one-week high.

Tellingly, a ratio tracking the performance of the tech-heavy Nasdaq 100 indexrelative to the blue-chip Dow Jones Industrial Average sank as the GDP data hit the wires. That spoke to rotation out of rates-sensitive and into cash-rich names, implying speculation about stimulus withdrawal.

GOLD PRICES LIKELY TO FALL IF US PCE DATA TOPS EXPECTATIONS

The spotlight now turns to the Fed’s favored PCE gauge of US inflation. The latest figures due on Friday are expected to show the core price-growth rate has increased to 1.8 percent on year, marking the highest reading in 13 months. The headline number is penciled in at a 31-month high of 2.3 percent.

US inflation data has increasingly overshot analysts’ expectations in recent months, implying that baseline projections are understating realized price growth trends. That might set the stage for another upside surprise in the PCE report, stoking Fed policy normalization bets and punishing gold.

GOLD TECHNICAL ANALYSIS

Gold prices may forming a bearish Head and Shoulders (H&S) pattern just the $1800/oz figure. Confirming the setup with a daily close below the 1755.83-64.22 area may set the stage for a push through the support shelf at 1720.80. Neutralizing the topping pattern calls for a breach of the swing high at 1797.83.

Gold price chart created using TradingView

GOLD TRADING RESOURCES

— Written by Ilya Spivak, Head Strategist, APAC for DailyFX

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter

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