Gold struggles as rising US Treasury yields outweigh dovish Fed repricing

Gold (XAU/USD) treads water on Thursday as a stronger US Dollar (USD) and soaring US Treasury yields limit the upside. At the time of writing, XAU/USD trades around $4,167, up 0.26% on the day, as the precious metal struggles to build on its early recovery.

The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, climbs to a fresh year-to-date high near 101.85. Meanwhile, the benchmark 10-year US Treasury yield rises to around 5.34%, its highest level since 2002.

Higher Treasury yields increase the opportunity cost of holding non-yielding assets such as Gold, while a stronger US Dollar makes the precious metal more expensive for buyers using other currencies.

The advance in the US Dollar and Treasury yields comes even as traders scale back expectations that the Federal Reserve (Fed) will raise interest rates this month following mixed US economic data released on Wednesday.

The US Personal Consumption Expenditures (PCE) Price Index showed that inflation moderated more than expected in August. Core PCE inflation rose 0.2% MoM, below the 0.3% forecast, while the annual rate remained unchanged at 3.0%, undershooting expectations of 3.3%.

However, an upward revision to US economic growth highlighted the continued resilience of the world’s largest economy. Annualized Gross Domestic Product (GDP) expanded by 2.2% in the second quarter, above economists' 1.5% growth forecast.

According to TD Securities, the latest PCE and GDP revisions were "a mixed bag with hawkish backward adjustments to growth and dovish adjustments to inflation." However, the firm stresses that "the underlying trend is the key story," with "robust growth with rising inflation risks" expected to continue to dominate the Fed's outlook.

The CME FedWatch Tool shows traders now see about a 37% chance the US central bank will raise interest rates at its October 27-28 meeting, down from 70% earlier this week.

The dovish repricing offers some support to Gold, although it has done little to prevent the US Dollar and Treasury yields from advancing. Resilient economic growth gives the Fed more room to tackle inflation, which remains above its 2% target, and keeps another rate hike later this year on the table. Meanwhile, the lack of progress in US-Iran negotiations to reopen the Strait of Hormuz keeps Oil prices elevated and inflation risks tilted to the upside, supporting the case for tighter monetary policy.

Looking ahead, Thursday’s US economic calendar features weekly Initial Jobless Claims, the ISM Manufacturing Purchasing Managers Index (PMI) and speeches from Fed officials, ahead of Friday’s closely watched Nonfarm Payrolls (NFP) report.

Technical Analysis: Bearish bias holds as RSI remains below 50

On the daily chart, XAU/USD maintains a bearish near-term bias as it sits below the 20-day Bollinger Simple Moving Average (SMA) at $4,301. The metal is also capped well beneath the upper Bollinger band at $4,471, keeping rallies contained while the Relative Strength Index (RSI) is around 40 and a negative Moving Average Convergence Divergence (MACD) reading both hint at limited bullish momentum and a corrective tone within a weakening trend, as suggested by the Average Directional Index (ADX) near 19.

On the downside, immediate support emerges at the lower Bollinger band near $4,131, ahead of the horizontal floor at $4,100, with a deeper bearish extension exposing the $4,000 level. On the topside, recovery attempts would first face resistance at the 20-day Bollinger SMA at $4,301, followed by the upper band at $4,471, while a stronger bullish reversal would only take shape on a sustained break above the structural barrier at $4,700.