Tone of Fed Statement Will Determine Gold’s Direction This Week

Gold futures closed lower last week in a volatile trade. The market was pressured by a sharp rise in the U.S. Dollar, firm Treasury yields and hawkish expectations from the U.S. Federal Reserve. In between the steep break, the market did post a respectable short-covering rally after the U.S. reported a contraction in the economy during the first quarter. Nonetheless, it wasn’t enough to save the market from posting a huge loss for the week and month.

Last week, June Comex gold futures settled at $1911.70, down $22.60 or -1.17%. The SPDR Gold Shares ETF (GLD) finished at $176.91, down $3.38 or -1.91%.

US Dollar Hits 20-Year High Against Major Currencies

Gold price retreated last week as the dollar hit a 20-year high against rivals as the Bank of Japan doubled down on its dovish policy, sending the Yen to its weakest level since 2002, while the Euro hit a five-year low on growth concerns for the region.

The dollar shot past the key level of 130 yen after the BOJ strengthened its commitment to keep interest rates ultra-low by vowing to buy unlimited amounts of bonds daily to defend its yield target. Meanwhile, the Euro remained under pressure as the war in Ukraine weighed on Euro Zone growth.

The weak Yen and Euro helped catapult the dollar to its highest level since December 2002 against a basket of currencies. The greenback has benefited from expectations the Federal Reserve will hike rates faster than peers.

A stronger U.S. Dollar tends to weigh on foreign demand for dollar-denominated gold.

Treasury Yields Jump after Another Sign of Rising Inflation

After dipping a little early in the week, U.S. Treasury yields jumped Friday after another inflation reading showed prices on the rise.

The yield on the benchmark 10-year Treasury note rose 6.5 basis points to 2.928%. The yield on the 30-year Treasury bond added 6.6 basis points to 2.995%.

US Economic Reports Show GDP Contraction, Surge in Inflation

The U.S. economy unexpectedly contracted in the first quarter amid a resurgence in COVID-19 cases and drop in pandemic relief money from the government, but the decline in output is misleading as domestic demand remained strong.

Gross domestic product fell at a 1.4% annualized rate last quarter, the government said in its advance GDP estimate. Economists polled by Reuters had forecast GDP growth rising at a 1.1% rate.

Despite the reasons for the GDP contraction, gold traders may have taken the news seriously. The report may have been the reason some gold sellers booked profits, fueling a short-covering rally.

On Friday, however, a hot inflation report underscored the difficult macro environment. The core personal consumption expenditures price index – the Fed’s preferred inflation gauge – rose 5.2% from a year ago.

Weekly Forecast

This week’s Fed interest rate decision could make or break the gold market.

Rising inflation and the Fed’s plans to aggressively hike interest rates in order to combat these prices pressures have fueled investor concerns of a slowdown in economic growth.

The Fed is expected to raise interest rates by 50-basis points on May 4. This news has been telegraphed for weeks and is the primary reason for last month’s sell-off in gold.

The central bank could drive gold prices even lower if the tone of its policy statement is extremely hawkish. However, there are some who believe the Fed could go too far which would increase the odds of a recession later in the year. This could trigger a meaningful short-covering rally.