Gold price hangs tough as US dollar dominates proceedings

Gold appears poised for a breakout move after being sidelined so far this week. At the end of last week, it was caught in the crossfire of the US dollar ricocheting around rate expectations.

The US dollar has been sucking many currency pairs into a whirlpool of large daily moves, most notably against the Japanese yen and the Australian dollar. The gold price has been contained in a relatively narrow range of US$ 1,860 – 1,885 so far this week.

The driver of the greenback gyrations kicked off with probing perceptions around the rate path from the Federal Reserve before solid jobs data somewhat stupefied the market.

The strength of the US economy surprised many analysts as it came despite the rapid rise in the Fed funds rate since tightening began in March 2022.

Ultimately, Treasury yields are higher today than they were at this time last week and this helped to boost real yields. The real yield is the nominal bond return less the market-priced breakeven inflation rate, which is derived from Treasury Inflation Protected Securities (TIPS).

Gold being a non-interest-bearing asset, the increase in yields elsewhere could further undermine the yellow metal if that trend is to continue.

Overnight, Fed Chair Jerome Powell stuck to the Fed’s mantra, that being, further rate hikes are coming and that rates will need to stay high for quite a while to get inflation back down to their target of around 2%.

Risks assets, including equities and high beta growth-linked currencies, got a lift thanks to market perceptions that the Fed chief hadn’t pushed back hard enough on the market view that Fed is bluffing.

The interest rate market has raised the pricing of the terminal rate to near 5.15% but they still see a cut coming in late 2023. Something several Fed board members have consistently said is not likely.

The US dollar is softer into the Asian session today and gold is marginally firmer. Through all of the mayhem in other markets of late, gold volatility remains relatively low by historical standards. A breakout of volatility could see momentum build in the direction of the initial move.

Gold against US dollar (DXY), US ten-year real yields and volatility (GVZ)

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