XAU/USD Turns on Hawkish Fed, Stronger USD and Yields

Gold (XAU/USD) Analysis

• Hawkish FOMC minutes deliver a harsh dose of reality
• Gold on track for largest weekly drop since December
• XAU/USD daily chart highlights negative divergence as bullish momentum wanes
• Gold market trading involves a thorough understanding of the fundamental factors that determine gold prices like demand and supply, as well as the effect of geopolitical tensions and war. Find out how to trade the safe haven metal by reading our comprehensive guide:

Hawkish FOMC Minutes Deliver a Harsh Dose of Reality

The FOMC minutes released last night brought with it a renewed focus on the problem at hand, inflation. The April US CPI managed to snap a run of hotter-than-expected inflation readings, a reason to breathe a slight sigh of relief but the FOMC minutes reminded markets of the harsh reality that lies ahead.

Participants at the meeting envision it will take longer than previously thought to acquire the necessary confidence that inflation is moving sustainably towards the 2% target. In addition, various participants discussed their willingness to tighten policy further should risks to the inflation outlook deem it appropriate.

As a result, the rate sensitive 2-year Treasury yield rose, as did the US dollar – weighing on the precious metal as can be seen below.

Spot Gold, DXY (green line) and US 2-year Treasury Yields (purple line)

Source: TradingView, prepared by Richard Snow

Gold on Track for Largest Weekly Drop Since December

Gold reached a new all-time high this week but wasted no time to head back lower, currently on track for the largest weekly drop since the end of last year. In 2024, gold has enjoyed massive gains in anticipation of lower interest rates which are not only yet to materialize in the US but appear further away thanks to stubborn inflation prints.

Central bank buying has also seen a notable increase, particularly in China where the local yuan has been depreciating against the dollar on a consistent basis. Additionally, pullbacks during the bull trend have been shallow apart from what we saw in April, which emerged as the first signal that bullish momentum may start to wane.

Gold (XAU/USD) Weekly Chart

Source: TradingView, prepared by Richard Snow

The daily gold chart is notable, not only for the sharp reversal but also for the unfolding negative divergence – a topic explored in our educational article uncovering the ins and outs of the relative strength indicator.

While gold made a higher high, the RSI indicator printed a lower high, suggesting that the underlying momentum may come under pressure. Gold tests the 161.8% Fibonacci extension of the 2020 to 2022 decline. A close below this level suggests the pullback may garner newly found momentum into next week where markets will be looking ahead to US PCE inflation data to round out the month.

$2,319 is the next level of support to the downside, followed by the May swing low of $2,277. In the event bulls pick things back up, a close above the 161.8% Fib retracement at $2,360 appears as a good level to consider a continuation of the bull trend.

Gold (XAU/USD) Daily Chart

Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX