Gold resumed last week’s downtrend and trades lower in the London Night session on Monday. From a fundamental perspective, gold’s outlook is bearish as global interest rates are on the rise in response to surging inflation, worsening the appeal of holding the non-interest-yielding commodity.
The US dollar index is a weighted currency index which is generally used as a standard for the US dollar performance. DXY continues its upward trend after last week’s US inflation data for April – which printed lower than the March print – surprised to the upside. Higher inflation data underpins the value of the greenback at a time when the Fed is fully motivated to raise the Fed funds rate. Current market expectations see the Fed hiking rates a further 190 basis points before the end of the year.
The US dollar impact on gold appears to be outweighing the effect of inflation on gold prices. Gold has been lauded as an inflation hedge, however, the relationship holds up better over the long-term, implying that higher inflation in the short term is actually more likely to result in lower gold prices due to the stronger dollar and higher interest rates adjustment that typically follows.
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