Gold Price Analysis: XAU/USD remains underpinned near $1860 as buck, equities falter, yields remain subdued

• Gold is a little higher on Tuesday as it benefits from weaker equities, lower yields and a softer dollar.
• XAU/USD was last trading just above its 21DMA and near $1860, more than $50 higher versus earlier weekly lows.
• Gold traders are focused on upcoming US PMI data and more remarks from Fed Chair Jerome Powell.

Spot gold (XAU/USD) is unsurprisingly trading with an upside bias just above its 21-Day Moving Average at $1856.70 and near the $1860 mark amid a favourable macro backdrop that sees long-term US yields hovering close to monthly lows, US equities reversing Monday’s gains in pre-market trade and the DXY falling to fresh four-week lows under 102. The precious metal was last trading with gains of about 0.2%, boosted amid safe-haven flows from equities, by falling yields lowering the “opportunity cost” of holding non-yielding assets like gold, and as a the weaker US dollar makes the purchase of USD-denominated commodities like gold cheaper for international buyers, thus boosting its demand.

Focus turns to upcoming US flash PMI survey data for May scheduled for release at 1345GMT, as investors fret about the strength of the US economy. Recent indications from major US companies (most recently Snap’s guidance on Monday, but before that from major retailers last week) is that conditions are worsening, though other indicators haven't been quite so downbeat. Tuesday’s PMIs are expected to fall in the latter camp, but traders should monitor the data in case it triggers any cross-asset volatility.

Thereafter, Fed Chair Jerome Powell is scheduled to deliver some pre-recorded remarks at an event from 1620GMT. There is much less confusion/uncertainty about the Fed than there is about the current strength of the US economy. They are unequivocally hawkish, with Powell last week reiterating the bank’s desire to get rates to neutral by the end of the year (meaning a few more 50 bps hikes at upcoming meetings) and saying the bank wouldn’t hesitate to raise rates beyond neutral if needed to tame inflation, which remains far too high. Other Fed policymakers have all been reading off of the same script and the takeaway is clear, interest rates are moving higher.

The big question for markets is just how much higher. Gold traders should beware that while the US dollar’s recent pullback from multi-decade highs printed earlier in the month has given the precious metal some short-term respite (its currently more than $50 higher versus earlier monthly lows), this may prove short-lived if inflation fails to moderate as fast as the Fed wants in the coming months, and if markets subsequently start betting on a higher Fed terminal rate. This would push long-term yields and the US dollar higher, which would make a return to sub-$1800 levels likely.