XAU/USD bulls point to further US dollar weakness

Potential catalysts for the day ahead will come during the US session with New York Fed President John Williams and retail sales in the United States. The Fed will then enter a shutdown until its next interest rate decision later this month. This makes the US data the proof.

TD Securities analysts explain that retail sales are likely to decline in December, even as higher prices have boosted nominal values. “Spending may be dampened by the disappearance of fiscal stimulus, an earlier-than-normal recovery of holiday shopping and Omicron. We are looking for a notable drop in total revenue of 1.4% month-on-month (consensus: 0.1%) and a larger decrease of 2.0% for the control group (consensus level: 0.1%) consensus: unchanged). Real and nominal spending remained strong QoQ and strong YoY dollars. XAU/USD is trading around $1,820 and down around 0.1% as the DXY index attempts to correct its late-December lows until the current financial year’s sell-off.

US$ as measured by the DXY Index, sold off from 96.90 to a recent low of 94.66. For weeks, XAU/USD is up more than 4%. However, in what could be a more technical move, the yellow metal failed to capitalize on falling US yields and the greenback on Thursday. DXY fell 0.4% and the US 10-year yield fell 2.5 basis points to 1.718%. “The persistently weak US dollar failed to lift gold prices as investors expressed concerns about the Fed’s hawkish move to contain inflation,” said analysts at ANZ Bank.

However, that won’t explain why the greenback and yields continue to fall. Instead, the bond market appears to be reassessing the pace of the Fed’s balance sheet liquidation following less hawkish rhetoric from Fed Chairman Jerome Powell and Fed Chairman Philly Patrick Harker.

On Thursday, Harker said he sees the Fed beginning to shrink its balance sheet “in late 2022 or early 2023” after the central bank raised its target interest rate enough, to about 1% from level close to zero. The comments echo those of Powell, who said the Fed could begin shrinking its balance sheet later this year during a confirmation hearing before the Senate Banking Committee. “At some point, maybe later this year, we’re going to start to see the balance sheet collapse, and that’s just the path to policy normalization,” he said, adding that the US economy “no longer needs or wants” the Fed. policy is very appropriate.

These remarks contrast with those of other more belligerent officials, such as Atlanta Fed President Raphael Bostic. “There is a risk that inflation will be high for a long time and we need a direct, clear and decisive response,” Bostic told Reuters in an interview on Monday. Bostic explains that central banks should also be aggressive on their balance sheets, allowing their holdings to drop by at least $100 billion per month and with plans to withdraw at least $1.5 trillion a quick run of financial markets that it considers pure “liquidity”.