Gold Price Analysis: XAU/USD chopping either side of its 21DMA in mid-$1730s

Spot gold (XAU/USD) prices have been choppy and recently fell back towards this week’s lows around $1730, with prices having been buffeted by the conflicting forces of falling US bond yields against a strengthening US dollar. Spot prices thus continue to trade well within recent ranges; to the upside, last week’s post-FOMC highs at just under $1756 is the key area of resistance to watch, whilst last week’s low at around $1720 is the main area of support to take note of. Until the US dollar and US bond yields can start moving in sync with each other again, god might well continue to chop either side of its 21-day moving average at $1736.50.

Driving the day

As noted, gold is caught between the conflicting forces of a continued drop in US government bond yields (the 10-year yield is now close to 1.65%, a near 10bps pull-back from last week’s highs) and a strengthening US dollar (the Dollar Index or DXY hit fresh two week highs on Tuesday and is comfortably back above the 92.00 level again). The reason for the drop in US government bond yields is not abundantly clear; 1) having been relentlessly hammered in recent weeks, investors might be being tempted back into investing in US bonds with yields now at more attractive levels and 2) with markets in a somewhat defensive mood (global equities, risk-sensitive commodities and currencies are mostly lower), there could be an element of safe-haven demand for US debt.

That latter point appears to be the reason why USD and JPY (safe-haven currencies) are doing the best in the G10 on the day. In fairness, a good part of USD’s strength is also coming from exogenous factors; i.e. extreme weakness being seen in NZD (which is also dragging AUD and other risk-sensitive currencies lower) after the New Zealand government has seemingly eased pressure on the RBNZ to halt the advance in house prices with the unveiling of its own NZD 3.8B housing fund.

In terms of recent market developments, nothing has really had too much impact on the price action, but a few stories are worth noting; the Philly Fed non-manufacturing survey for March was the latest in a string of very strong regional Fed surveys to point to continued strength in the US economy – investors will look for confirmation of this in Wednesday’s preliminary US Markit PMI survey (for March), and this could help re-ignite some optimism about the US recovery (which could push yields and USD higher again at the expense of gold). Meanwhile, Fed Member Robert Kaplan was on the wires earlier talking about the Fed hiking rates in 2022 (much earlier than current FOMC guidance for no hikes through 2023) – clearly, Kaplan is amongst the more hawkish Fed members, but will not be able to vote again until 2023, so will not actually be able to vote for a hike next year, even if he supports one.

Rest of the session

Looking ahead for the rest of the session, Fed Chair Jerome Powell is about to start his first of two days of testimony before Congress. His pre-released remarks contained no new information on the Fed’s view of the economy or policy guidance compared to what was in last week’s monetary policy statement, but markets will be listening to the Q&A section of the testimony. Other Fed members will also be speaking including Raphael Bostic, Thomas Barkin, Lael Brainard and John Williams, all of whose remarks will also be worth watching to see if they deviate from the usual Fed script as was the case just now with Kaplan. Any unexpected hawkish vibes could be gold negative.