Gold futures are trading slightly lower at the mid-session on Friday, while heading for its fifth consecutive weekly loss. Although bullion took a beating this week due to a sharp rise in the U.S. Dollar, today, the weaker dollar is underpinning gold. A dip in Treasury yields is also supporting gold today, but a sharp rise in yields has been damaging to gold prices this week.
Dollar Weakness Provides Some Support
The U.S. Dollar fell on Friday as investors evaluated how high the Federal Reserve is likely to raise interest rates by when it meets later this month and as investors took profits after a strong rally that sent the greenback to a two-decade high on Thursday. This may be the reason the selling pressured eased today.
The story was different throughout the week, however, as gold prices plunged as the greenback jumped amid expectations of faster and further rate hikes than peer central banks as inflation soars to four-decade highs.
Front-Loaded Rate Hike Expectations Weigh on Gold Prices
Gold declined sharply as traders ramped up bets that the Fed will hike rates even faster after data on Wednesday showed U.S. annual consumer prices jumped 9.1% in June, the largest increase in more than four decades.
Odds of a 100 basis points move fell, however, after two of the most hawkish Fed officials on Thursday said they would prefer a 75 basis points hike.
Fed funds now indicate a 73% chance of a 75 basis points increase and a 27% chance of a 100 basis points increase.
Little Reaction to US Retail Sales Report
U.S. retail sales rebounded strongly in June as Americans spent more amid soaring inflation, which could allay fears of an imminent recession but not change the view that growth in the second quarter are tepid.
Gold traders showed little reaction to the news as most believed high inflation was responsible for the jump in retail sales and not actual increased buying.
August Comex gold is rapidly advancing toward pre-pandemic price levels which could be a sign that most of the weaker speculators have been taken out of the market.
Speculators have lost their main reason to buy gold with the Fed removing the free dollars from the economy. This creates a potential buying opportunity for professionals who like to re-enter a market after weak speculators have been taken out.
Don’t be surprised if we see a short-term counter-trend rally before the downtrend resumes.
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This article was originally posted on FX Empire