Gold price forecast: XAU weighs yields, US dollar, Fed path amid crude oil pullback

Gold prices remain under pressure in APAC trading after falling through the US session. A drop in oil prices appeared to soften demand for inflation-indexed bonds, pushing real yields higher. That may be a function of increased confidence in the Federal Reserve’s ability to engineer a soft landing through their rate-hiking cycle.

Those factors bode poorly for gold prices. The avoidance of a recession would likely keep equity prices afloat. Gold may lose some of its appeal as a volatility hedge in that scenario. The Nasdaq 100 index rallied overnight, but technology stocks are off to a bumpy start for earnings season. Bullion prices may see renewed upside if earnings through the rest of the week fail to impress.

Meanwhile, the Fed’s aggressive outlook continues to push traders out of Treasuries as the chance of a 50-basis-point (bps) rate hike at the May FOMC meeting firms up. Currently, overnight index swaps (OIS) are pricing in the first set of consecutive 50bps hikes since the early 1980s. This is driving nominal yields higher, widening the US yield premium versus other major economies.

The US dollar has benefited greatly from that premium, with the DXY index hitting its highest level since March 2020. A stronger USD is typically seen as a headwind for the yellow metal. That seemingly leaves gold prices without much upside potential at the moment. However, traders may not be too keen to sell XAU just yet, as the economic backdrop policy bets (and thereby yields) remains highly precarious. Taking a neutral stance for the time being may be the most fundamentally prudent approach.

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