Analysis: GOLD, XAU/USD, US DOLLAR, S&P 500, FED BETS, NFP, TECHNICAL OUTLOOK

KEY POINTS

 

• Another round of aggressive Fed language made markets, particularly gold, bullion.
• Gold prices will track equity movements driven by FOMC rate rise expectations.
• XAU/USD stalls at the long-held support turned resistance level and the 50-day Simple Moving Average

 

On Wednesday, gold prices declined by roughly 0.5%, ending a recovery that began last week and sent the yellow metal nearly 6% higher after reaching its lowest levels since April 2020. Bulls profited from a resurgence in market mood as traders flocked to equities while abandoning the US Dollar. Bond traders aided in driving yields lower, so bolstering the non-interest-bearing asset.

On Wednesday, these patterns declined. Despite a strong intraday effort, US equities indexes concluded the day in the red. The S&P 500 index ended the day 0.2% lower, while the Nasdaq-100 Index fell 0.8%. And if not for a rise in crude oil prices that bolstered the energy industry, the decline would have been even more severe. The energy sector of the S&P 500 GICS gained 2.08%. Eight of the eleven sectors of the index were negative.

Currently, there is a strong correlation between gold prices and US equities indices, which are mostly influenced by wagers on Federal Reserve rate hikes. As I suggested last month, XAU traders may wish to take their signals from the S&P 500. Aside from China, Asia-Pacific markets are bucking the overnight bearish trend. This gives the XAU a modest boost as prices trade slightly around $1,720.

The equity markets may be losing steam. In a Bloomberg TV interview, when asked if the Fed would alter its rate path, Mary Daly of the Federal Reserve remarked, "We are committed to increase interest rates into restrictive territory..." Ms. Daly, one of the more generally dovish members, has issued a strong caution to speculators who appear eager to overreact to hints of easing.

According to Fed funds futures, rate traders are nevertheless factoring in a possible reversal in May. Even more generously, overnight index swaps price in a modest likelihood of a decrease by March of next year. Friday's release of the US nonfarm payrolls report and Thursday's appearances by Fed speakers Mester and Kashkari might have a big impact on these wagers. However, the next 48 hours may be tumultuous for markets, including gold prices.