Gold Retains A Bid, Despite Real Yield Divergence

Despite US real yields pulling out of the negative-yielding territory and the US Dollar maintaining its upward trajectory, gold prices have managed to retain a bid. While I struggle to see notable upside for the precious metal, given the move that we are seeing in the real yields, as I have mentioned previously, until support at 1880 is breached, technically, gold is in a neutral zone.

Gold Chart: Daily Time Frame

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Source: Refinitiv

As shown in the chart below, US real yields have been a good indicator of gold’s potential direction and thus the current divergence would suggest the outlook for gold is lower. Now while safe-haven flows stemming from geopolitical tensions have kept the precious metal underpinned. Unless there is a significant deterioration in current peace talks or a step up in sanctions, risks are for a pullback in gold given that an uber hawkish Fed is just around the corner. We have started to see a repricing in financial markets for a hawkish Fed with equities coming under pressure, alongside a firmer dollar in the lead up to the May meeting. In turn, it is possible that gold is perhaps the last to respond to this shift.

Gold vs US 10Y Real Yields

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Source: Refinitiv

Traders Await US Inflation Data

A source of market volatility will be today’s US inflation print, where the headline is expected at 8.4%, up from 7.9%. However, when looking at the distribution of forecasts, many are expecting an upside surprise, which in turn limits the potential market reaction, should a higher than expected print be realized. Therefore, there is a greater potential for an in-line print or slightly softer than expected print to produce an outsized market reaction. That said, the move may be more of a knee-jerk, given that the data is unlikely to alter the short-term outlook for Fed policy.

US Inflation Forecast Distribution

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Source: Refinitiv

The table below looks at the 30-minute reaction to the US CPI across multiple assets. While context is important during each print, the general reaction has been one where a higher than expected print leads to a firmer USD (vs JPY in particular) with equities softer, while an in-line or lower than expected print, prompted the USD to soften.

30-Minute Reaction to US CPI

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Source: Refinitiv, DailyFX