Sentiment improved slightly during European trading on Monday, with European stocks largely ignoring the late-day jitters in Asia. At present, hedge funds, block trading, an increase in the number of new cases in Europe and the opening of the Suez Canal are flooding the market, but optimism about vaccinations and the US $3 trillion infrastructure plan is still supporting the market risk sentiment, the dollar is basically stable, spot gold continued to lose $1,730.
Spot gold continued to fall in Europe on Monday, trading below $1,730 after Posting its first weekly decline in three weeks last week.
Technically, gold doesn’t seem to have changed much, with price movements in both directions suggesting some caution before making big bets. That said, gold’s repeated failure to gain a foothold at higher levels supports the prospect of further near-term declines. Confirming a bearish bias, however, would require a sustained break of support around the $1,720 trading range that has been in place for nearly two weeks.
This will be seen as a fresh trigger for bearish traders and accelerate the vulnerable commodity’s slide towards the $1,700 mark. Gold’s decline could then widen and take it back near multi-month lows of around $1,677 to $76 touched earlier this month.
On the other hand, the $1744-1745 area is likely to continue to be a strong resistance level, with further resistance looking towards the post-FOMC high of $1755 followed by $1760. The latter is in line with the 200-period moving average on the 4-hour chart and could trigger short covering if it is decisively breached. At that point, gold is likely to break through the mid-range around $1,773 – $75 and fight for a break above $1,800.
FXTM also notes that even if the rally in bond yields paused, it would provide little support for gold, which is yielding zero. It is increasingly clear that the strong dollar is the culprit behind gold’s fall. Encouraging progress on vaccines in the US has boosted interest in the dollar by raising hopes of a faster recovery in the US economy. That could drag gold lower if the dollar continues to rally in the coming week. Gold could still rebound if COVID-19 concerns in Europe intensify risk aversion.
At this stage, FXTM says, the technicals favor bears, with a weekly close below $1,730 accelerating the decline toward $1,700 and cycle lows.
Fundamentally, analysts say the dollar and global equities are firming on the back of an improving economic outlook, while high bond yields are putting further pressure on gold.
The dollar was firmer at the start of the week as a strong U.S. economy and vaccinations progressing much faster than in Europe drew investors into the greenback.
Europe’s COVID-19 crisis is likely to divide further this week, with public health conditions deteriorating in France and Germany, although the UK took further steps on Monday to ease its lockdown.
The euro is on track for its biggest one-month drop since mid-2019 as Europe struggles with a weak vaccination program and a new outbreak, despite data showing investors remain heavily long in the single currency.
“The focus will largely remain on the European outbreak and whether the blockade can slow the rise in the number of cases, and whether vaccination can eventually be accelerated,” ING economists said in a daily report.
Weekly positioning data showed the broader trend toward a more bullish dollar remained solid, with hedge funds cutting overall short bets to their lowest level since June 2020 while increasing bets against the yen.
“The dollar is also benefiting from some pretty good economic data from the US itself, good progress in vaccine vaccination and Wall Street (closing higher),” said Imre Speizer, currency strategist at Westpac Bank.
U.S. Treasury yields remained near one-year highs set on March 18. Treasury yields have started the week higher, with the 10-year yield edging up to 1.66% Monday morning.
At 4:50 a.m. ET, the yield on the benchmark 10-year Treasury note rose to 1.662 percent, while the yield on the 30-year Treasury note rose to 2.367 percent. Yields move inversely to prices.
“Yields are a near-term threat to gold,” said Michael McCarthy, chief market strategist at CMC Markets in New York. “If bond selling momentum picks up, gold could fall below $1,700 ‘very quickly.'”
Recently, US Treasury yields have risen rapidly on fears of big inflation as the economy recovers from the coronavirus pandemic. However, Friday’s price index for personal consumption expenditures showed that price inflation was tame in February.
The core personal consumption price index (PCE) rose 1.4 per cent in the 12 months to February, having risen to 1.5 per cent in January.
Ben Jones, senior strategist at State Street Global Advisors, said on CNBC’s Squawk Box Europe on Monday that concerns about inflationary pressures will continue to be “the dominant story in the coming months,” and that he believes the bond market is “testing [the Fed’s] resolve.”
Fed Chairman Colin Powell said earlier this month that the central bank does expect inflation to pick up this year, but said such a “temporary uptick” would not be enough to justify a change in policy.
“I’m not going to fight the Fed personally,” Jones said, agreeing that while inflation will rise over the summer as the economy recovers, “inflation will start to edge down after the end of the year.”
Jones, however, does not believe that inflation will return to “low levels” because households and businesses will save to spend after the pandemic. As a result, he expects inflation to be “slightly higher” than in the past few years, but not “rampant.”
Investors awaited details of a proposed multitrillion-dollar U.S. fiscal spending plan that many hope will fuel a global economic recovery. That has further hurt gold prices.
Market participants are now awaiting U.S. President Joe Biden’s infrastructure spending plan, expected to be between $3 trillion and $4 trillion, to be unveiled on Wednesday.
The Biden administration will this week unveil the first part of a multitrillion-dollar infrastructure plan that will focus on roads and Bridges; The second part, expected in April, covers children and health care.
In an interview with Fox News Sunday, White House Press Secretary Jen Psaki wouldn’t confirm the size of the infrastructure plan, but acknowledged it would be divided into two pieces of legislation, in part because of hopes for Republican support. She stressed that the United States still has no strategy in place to move forward with legislation and will work with the House and Senate to ensure a smooth legislative process.