Daily Market Recap – Gold prices at three-month high on overheating outlook

The price of gold continues to benefit from the weakness of the dollar and fears of an overheating economy. The massive injection of liquidity coupled with massive government stimulus plans and the almost synchronized reopening of the world's major economies are raising fears of runaway inflation.

As a result, the yellow metal hit a three-month high of $1,850 on Monday. Fed members are much more sceptical about the return of inflation, believing that the rise in prices above the Fed's target will only be temporary.

Market participants' 5-year inflation outlook rose to its highest level since 2014 to 2.34% last week from just 2% in early March. This rise in the inflation outlook is thus putting pressure on real bond yields. The US 5-year real yield fell to a record low of -1.8% last week and the 10-year yield fell to its lowest level since early February at -0.90%.

In this context, the next economic publications should be particularly important for the markets. The more positive and better than expected economic data, the more credible the overheating scenario will be, which will increase the chances of the Fed normalizing its monetary policy. Conversely, the more disappointing the economic statistics, the less likely the market will be to expect the Fed to normalize monetary policy quickly.

Of the economic data, employment data is expected to be the most important, as the Fed has indicated that it will wait for the labor market to return to pre-crisis levels before considering a rate hike. The weekly unemployment figures and monthly job creation figures (NFP) should therefore be particularly scrutinized by the markets.

In terms of technical analysis, we can see that gold prices have returned to test the upper limit of the bearish channel in which it has been moving since last fall, as well as its 200-day moving average. Although the short-term trend is bullish, the risk/reward ratio is not in favor of buyers below this line.

(Chart Source: Tradingview 17.05.2021)

Gold's reaction below the upper bound of the channel will be decisive for the medium- and long-term outlook. A breakout from the top of the channel would signal a new uptrend and a return to last summer's highs at around $2075, while a pullback would open the way for a new leg down to new lows.

Disclaimer: This material has been created for information purposes only. All views expressed in this document are my own and do not necessarily represent the opinions of any entity.