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- Gold closed the second straight week in positive territory.
- XAU/USD could extend its rally toward $2,000 before turning overbought.
- Safe-haven flows continue to dominate the markets amid inflation fears, geopolitical tensions.
Gold managed to build on the previous week’s gains and registered its highest weekly close in a month above $1,970. The yellow metal ignored rising US Treasury bond yields for the majority of the week and continued to find demand as an inflation hedge and a safe haven.
What happened last week?
Gold started the week on a firm footing but erased a large portion of its daily gains after rising all the way to $1,970 on Monday.
The negative shift witnessed in risk sentiment on Tuesday provided a boost to the yellow metal. Fading hopes about Russia and Ukraine reaching a peace agreement, the ongoing coronavirus-related lockdowns in China and inflation fears forced investors to seek refuge. Reflecting the sour market mood, major equity indices in the US suffered heavy losses.
The US Bureau of Labor Statistics reported that inflation, as measured by the Consumer Price Index (CPI), surged to a new multi-decade high of 8.5% on a yearly basis in March from 7.9% in February. In the same period, the Core CPI edged higher to 6.5% from 6.4%.
The broad-based selling pressure surrounding the greenback on Wednesday allowed XAU/USD to extend its rally to a fresh monthly high of $1,981. In the absence of high-impact macroeconomic data releases, the sharp decline witnessed in the US Treasury bond yields made it difficult for the dollar to find demand.
On Thursday, surging US T-bond yields and the renewed dollar strength capped gold’s weekly gains.
Following the April policy meeting, the European Central Bank (ECB) announced that it left its policy settings unchanged. The ECB decided to stick to its plan of reducing net asset purchases under the Asset Purchase Programme (APP) to €20 billion in June before concluding the QE in the third quarter. During the press conference, ECB President Christine Lagarde repeated that the rate increase would come ‘some time’ after the end of the APP. EUR/USD touched its lowest level in two years below 1.0800 post-ECB, reflecting the market pricing of the ECB-Fed policy divergence. Moreover, the benchmark 10-year US T-bond yield rose 4.5% and settled above 2.8% ahead of the Easter holiday.
Although XAU/USD dropped all the way to $1,960 during the dollar rally on Thursday, it almost fully retraced its daily decline and closed the week above $1,970. In the meantime, XAU/EUR rose nearly 2% on a weekly basis, helping the precious metal stay resilient in the face of surging US yields.
Next week
China will release the Gross Domestic Product (GDP) on Monday, which is expected to show an annualized growth of 4.4% in the first quarter. A weaker-than-forecast GDP print could cause markets to turn risk-averse at the start of the week and help gold find demand and vice versa.
On Wednesday, the Fed will publish its Beige Book and investors will pay close attention to the details surrounding price pressures. On Friday, the S&P Global’s preliminary April Manufacturing and Services PMI reports for the US will be looked upon for fresh catalysts. The headline PMI figures are expected to confirm that the business activity in the private sector continued to expand at an impressive pace in early April. Unless these reports point to a significant loss of momentum in activity, the dollar should be able to hold its ground against its major rivals.
On Thursday, FOMC Chairman Jerome Powell speak on the global economy at an event organized by the International Monetary Fund.
The CME Group FedWatch Tool shows markets are pricing in a nearly-70% probability of back-to-back 50 basis points Fed rate hikes in May and June, compared to 55% last week. Despite this 15% increase in the odds of a total of 100 bps hike by June, the 10-year US T-bond yield rose 4% on a weekly basis. This development suggests that the Fed’s aggressive tightening outlook is now largely priced in and US yields could find it hard to push higher in the near term. In such a scenario, gold could continue to stretch higher.
Gold technical analysis
Gold closed the last five trading days above the 20-day SMA. Additionally, the Relative Strength Index (RSI) indicator on the daily chart holds near 60, confirming that bulls remain in control of gold’s price action.
On the upside, $1,990 (Fibonacci 23.6% retracement of the February – mid-March uptrend) aligns as first resistance. With a daily close above this level, XAU/USD could target $2,000 (psychological level) and $2,010 (March 10 high).
$1,950 (Fibonacci 38.2% retracement, 20-day SMA) forms a key support. In case this level turns into resistance, a deeper downward correction toward $1,930 (50-day SMA) and $1,920 (Fibonacci 50% retracement) could be witnessed.
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