Gold futures surged on Wednesday, hitting its highest level since September 15 as investors reacted to a plunge in the U.S. Dollar. Gold traded higher, despite the fact that yields across the curve moved higher. Lower demand for higher-risk assets also helped support gold prices. However, the rally may have been limited due to the steady rise in yields.
On Wednesday, February Comex Gold futures settled at $1319.30, up $5.60 or +0.43%.
The market rallied to $1328.60 on Wednesday in reaction to the steep drop in the U.S. Dollar. However, it settled $9.00 off its high, suggesting the early spike in prices was fueled by short-covering and buy stops rather than aggressive buying.
The catalysts behind the rally in gold were a report that China was ready to slow or halt its purchases of U.S. Treasurys and the dollar’s steep sell-off against the Japanese Yen.
According to reports from Bloomberg News, citing people familiar with the matter, officials reviewing China’s foreign-exchange holdings have recommended slowing or halting purchases of U.S. Treasuries.
The report triggered a volatile response in the U.S. Treasury market with U.S. 10-year Treasury yields spiking to a 10-month high.
The USD/JPY was under pressure for a second day at the start of trading on Wednesday due to Tuesday’s decision by the Bank of Japan to trim its buying of long-dated Japanese government bonds in market operations.
The move by the BoJ came as a surprise although some traders said it was just a technical tweak in line with the central bank’s policies to date. However, traders may have overreacted to the news because they thought it meant the Japanese central bank could be poised to begin winding down its stimulus.
A few reasons gold couldn’t sustain its breakout rally on Wednesday were investors didn’t want to take on new positions ahead of today’s U.S. producer inflation report, the stock market sitting near record highs and rising Treasury yields.
At 0808 GMT, February Comex gold futures are trading at $1317.60, down $1.70 or -0.14%.
On Thursday, investors will get the opportunity to react to a slew of U.S. economic data including the Producer Price Index, Weekly Unemployment Claims and the Federal Budget Balance. FOMC Member William Dudley is also scheduled to speak late in the trading day.
The U.S. Dollar could rise if producer inflation comes in higher than the 0.2% estimate, this could put pressure on gold prices.
Additionally, Reuters is reporting that a report that China is considering slowing or halting purchases of U.S. Treasury bonds may be based on erroneous information and could be “fake,” the country’s foreign exchange regulator said on Thursday.
Looking at the recent price action on the daily chart, the direction of the gold market is likely to be determined by trader reaction to $1317.10.
This article was originally posted on FX Empire
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