Gold prices have been under pressure on Friday and have dropped to a fresh year-to-date low during the first half of the European session. The XAU/USD is currently trading around the $1,824 region, down over 1% for the day, and seems vulnerable to further declines. The main factor behind the decline in gold prices is the sustained US Dollar buying, which has been driven by bets for additional rate hikes by the Federal Reserve.
The US Consumer Price Index (CPI) data on Tuesday showed that inflation remained stubbornly high in January, and this has strengthened the market’s expectations for more aggressive rate hikes by the Fed. The US Producer Price Index (PPI) also surprised to the upside on Thursday and rose by 0.7% in January. On an annualized basis, the PPI decelerated from 6.5% in December to 6.0%, though was above market expectations. This has further reinforced the market’s expectations for more rate hikes.
Two Fed officials also raised the prospect of a 50 bps hike in March, which has been weighing on the non-yielding gold prices. St. Louis Fed President James Bullard said that the central bank could return to raising interest rates at a sharper pace, while Cleveland Fed President Loretta Mester said that interest rates will likely rise above 5%. This has pushed the yield on the benchmark 10-year US government bond to its highest level since late December and has provided a strong boost to the US Dollar (USD).
The US Dollar Index, which tracks the Greenback against a basket of currencies, has also climbed to a fresh six-week high and is seen as another factor weighing on the US Dollar-denominated Gold price. The risk-off mood amid worries about economic headwinds stemming from rapidly rising borrowing costs has lent some support to the safe-haven precious metal and has helped limit losses.
From a technical perspective, this week’s breakdown below the 50-day Simple Moving Average (SMA) was seen as a fresh trigger for bearish traders. The subsequent fall supports prospects for a further near-term depreciating move. Hence, some follow-through weakness towards the $1,800 mark, en route to the 100-day SMA, currently around the $1,783 region, looks like a distinct possibility. On the flip side, the $1,835-$1,836 area seems to act as an immediate hurdle ahead of the $1,850 level and the 50-day SMA support breakpoint, around the $1,861 region.
To conclude, the US Dollar buying, rising inflation expectations and hawkish Fed officials have all contributed to the recent decline in gold prices. The technical setup also suggests that the XAU/USD is likely to remain under pressure in the near-term and could test the $1,800 mark. However, the downside could be limited by the risk-off mood and safe-haven demand for gold.