XAU/USD Benefits from Softer Dollar, Lower US Yields and Visual Test of 200DMA

  • Gold is higher amid risky flows, a weaker dollar and weaker US yields.
  • XAU/USD is again eyeing a test of its 200-DMA around $1,837.

Spot gold prices (XAU/USD) are trading around $1,830 per troy ounce and are eyeing a test of the 200-day moving average again around $1,837, after gaining around $15 ( or about 0.8%) so far on the session. Risk flows in the global equity space continued on Thursday after Wall Street’s worst day in nearly two years on Wednesday, as investors continued to worry about easing global growth expectations at a time where the main central banks (namely the Fed and to a lesser extent the BoE and the ECB) seem determined to aggressive monetary tightening.

This is a toxic combination for equities and investors have started to seek safety in traditional safe-haven assets such as US bonds, even as US bond valuations have been hit hard in recent months by the shift in Fed hawkish stance. Either way, US yields (both nominal and real) are lower on Thursday, dampening the attractiveness of the US dollar as a safe-haven currency, with the Swiss franc and the yen faring better.

The combination of lower yields, which reduces the “opportunity cost” of holding non-yielding gold, and a weaker US dollar, which lowers the price of USD-denominated commodities like XAU/USD for foreign buyers, had the double effect of supporting gold on Thursday. But it remains to be seen if these trends will continue and if XAU/USD can break above its 200-DMA and break out of its recent downtrend.

Over the past few weeks, buying USD dips and selling gold rallies has been a very profitable strategy. As long as the markets continue to believe that the Fed will continue with as much monetary tightening as it has promised, gold’s chances of rebounding towards, say, the upper $1,800 seem limited. Looking to the immediate future, a few US Level 2 data releases on Thursday in the form of the Philadelphia Manufacturing Survey in May, the initial weekly jobless claims report and April existing home sales probably won’t move the markets much. But the data will likely remain focused on the broad themes of slowing growth, inflation and central bank tightening.

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