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Market update: Gold price steadies as US dollar under pressure ahead of CPI

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The gold price might be at a crossroads with potentially conflicting signals; the US dollar appears vulnerable, but US Treasury yields remain high and US CPI this week could provide some directional clues.


original-size.webpSource: Bloomberg


Daniel McCarthy | Strategist, | Publication date: Monday 10 July 2023 

The gold price has started the week holding onto the gains seen on Friday when the US dollar slid lower across the board.

The dollar weakened despite Treasury yields continuing their march higher with the benchmark 10-year bond trading near 4.10%, a long way from the low of 3.25% seen in April.

The policy-sensitive 2-year note yielded over 5.10% last Thursday for the first in 16 years before dipping to 4.75% on Friday. It is now back above 4.90%.

The bumpy ride was indicative of the data points along the way as well as the Federal Open Market Committee (FOMC) meeting minutes revealing a more hawkish board than the market had previously perceived to be the case.

The interest rate market now weighs a 25-basis point hike by the Fed on the 26th of July at over 80% probability.

Of potential concern for gold bulls is the run-up in US real yields. The real yield is the nominal yield less the market-priced inflation rate derived from Treasury inflation-protected securities (TIPS) for the same tenor.

The 10-year inflation-adjusted return for Treasuries yielded over 1.82% on Friday. The last time it traded at these levels in 2009, spot gold was below US$ 1,000. A rising real yield in Treasuries offers an increasing return against the prospect of holding a non-yielding asset, like gold.

Of course, a lot has changed since then but US CPI on Wednesday will be closely watched to see if the Fed’s tightening continues to have the desired impact on inflation. A Bloomberg survey of economists is looking for year-on-year CPI to print at 3.1% to the end of June, against 4.0% prior.

The driving force pushing real yields higher has been the increase in nominal yields, with inflation expectations appearing to remain anchored for now, as shown in the chart below.

For gold traders, keeping an eye on US yields might be worthwhile for clues on possible directional signals.

GC1 (gold front futures contract) against US 10-year Treasury note, 10-year breakeven inflation rate and 10-year real yield


original-size.webpSource: TradingView

This information has been prepared by DailyFX, the partner site of IG offering leading forex news and analysis. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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