Rising expectations of further Fed monetary tightening, elevated Treasury yields, and a stronger US dollar had kept gold under pressure. However, the events in Sintra and the US employment report changed everything. Let’s discuss this topic and make a trading plan for XAU/USD.
The article covers the following subjects:
Major Takeaways
- Gold has regained its footing thanks to the Fed.
- A weaker US dollar is supportive for XAU/USD.
- Central bank demand will continue to support the precious metal.
- A sustained move above $4,170 will provide a buying opportunity.
Weekly Fundamental Forecast for Gold
Kevin Warsh’s speech in Sintra, Portugal, and disappointing US employment data allowed gold to rise from the ashes. The probability of Fed monetary tightening in July fell from 30% to 20%, dragging Treasury yields and the US dollar lower. The precious metal was quick to take advantage of the shift.
Unlike US stock indices, which recovered rapidly even during the Middle East conflict, gold failed to do the same. Rising oil prices fueled concerns about accelerating inflation and the prospect of the Fed keeping interest rates elevated for longer. Even Brent’s subsequent decline back to pre-war levels failed to support XAU/USD. The bears capitalized on Kevin Warsh’s hawkish surprise and pushed prices below $4,000.
S&P 500-to-Gold Ratio
Source: Bloomberg.
As a result, the S&P 500-to-gold ratio began to rise, indicating that gold had lost one of its key advantages—the debasement trade. This trade is based on expectations of widespread monetary easing and the depreciation of fiat currencies. However, if the Fed refrains from raising rates, this driver of the XAU/USD rally is likely to return over time.
Slower employment growth and Kevin Warsh’s less hawkish-than-expected comments pushed Treasury yields and the US dollar lower, providing strong support for gold. That said, expectations surrounding the Fed’s monetary policy were not the only factor behind the rally in Treasury yields.
Gold and Treasury Yield Performance
Source: Bloomberg.
Artificial intelligence requires enormous investment. The growing issuance of corporate bonds by technology companies prompted investors to sell Treasuries to raise cash. At the same time, Kevin Warsh’s brief remarks created uncertainty and increased the risk premium. These factors may remain in play, limiting the upside potential of XAU/USD.
One of the key arguments in favor of higher gold prices is the potential weakening of the US dollar in the second half of the year. Investors are increasingly convinced that the market has overestimated the Fed’s hawkish stance. At the same time, improvements in the global economy and international relations following the turbulence caused by tariffs and the Middle East conflict could reduce demand for the greenback as a safe-haven asset.
Add to this central banks’ intention to step up gold purchases, and the outlook for XAU/USD becomes decisively bullish. If the diversification of foreign exchange reserves was enough to support gold during the period of monetary tightening in 2022–2023, its prospects could be even stronger in an environment where no further rate hikes are expected.
Weekly Trading Plan for XAU/USD
In this environment, long positions opened on the decline toward $3,940 or on a breakout above $4,070 per ounce remain a sound strategy. A sustained move in XAU/USD above $4,170 will provide an opportunity to add to long positions.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of XAUUSD in real time mode
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Source: Original Article
