Gold prices edged lower on Thursday, ending four days of successive gains, in response to rising U.S. Treasury yields, a firmer U.S. Dollar and the easing of geopolitical tensions.
June Comex Gold futures settled at $1348.80, down $4.70 or -0.35%.
Gold fell in response to rising Treasury yields because the precious metal is a non-interest bearing instrument. Additionally, the boost in interest rates helped make the U.S. Dollar a more attractive investment. This pressured foreign demand for gold because it is a dollar-denominated investment.
The easing of geopolitical tensions were fueled by President Trump’s upcoming summit with North Korean leader Kim Jong Un, the news that the Western missile strikes in Syria last week-end were less extensive than some had feared, and the delay by the Trump Administration of additional sanctions on Russia.
The move in the U.S. Dollar suggests a major shift in sentiment may be taking place in the markets which could be short-term supportive for the Greenback and has the potential of turning it into a major event.
Recent economic data suggested business activities overseas may have peaked. This has reduced the appeal of the euro, yen, pound and other currencies which have strengthened against the dollar since 2017 based on the view economies outside the United States had been faring better until recent weeks.
The current price action indicates that the relatively optimistic view about the U.S. economy should be enough to support the Fed’s notion to raise interest rates at least two more time in 2018. Some traders are even pricing in as many as three rate hikes.
While the U.S. economy may not be firing on all cylinders, it has remained on a steady path and has done nothing to sway the Fed from sticking with its current pace of rate increases. A key futures market indicator strongly indicates that traders are already pricing in rate hikes in June, September and possibly December.
With traders having the opportunity to focus on economic data this week rather than geopolitical events, a strong upside bias may be developing in the U.S. Dollar with the index reaching its highest level since April 9.
In other news, U.S. Treasury yields rose on Thursday in reaction to better-than-expected economic data. In the U.S., the Labor Department reported that new applications for U.S. unemployment benefits fell last week. Also the Philadelphia Fed Index, a measure of manufacturing activity in the district, came in at 23.2 for March, higher than the 20.5 level expected by Wall Street economists.
Gold is trading lower early Friday and is now lower for the week. The price action is being driven by expectations of higher U.S. interest rates and easing political tensions on North Korea and Syria.
In the absence of renewed geopolitical tensions and major economic reports, the direction of the gold market today is likely to continue to be determined by Treasury yields and the U.S. Dollar. If they continue to rise then look for gold to be pressured. Losses may be limited if there is a decrease in demand for higher risk assets like stocks.
This article was originally posted on FX Empire
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