Gold price movements are heavily influenced by the path of the US dollar and the movement of US Treasuries. The movement of both the US dollar and Treasuries is dependent on the path of US interest rates. If markets perceive a coming increase in interest rates out of the United States, then yields and the USD rises. The strongest influence on gold is when yields and the dollar move together. They have an inverse relationship, so rising yields and a rising dollar can make gold fall and vice versa.

One of the key factors influencing the path of US interest rates is obviously how the US is doing in its battle against inflation. If the Federal Reserve is perceived to be winning the battle against inflation, it means markets will expect lower interest rates moving forward.

Lower interest, rate expectations, naturally weaken the dollar and send yields lower. Therefore, the best outlook for higher gold prices will involve a lower dollar and falling yields on lower US interest rate expectations. Last week, there was some strong US economic data which increased expectations for higher US rates. US ISM PMI services came in well above market expectations at 54.5 versus the maximum expectations of 53.9. Furthermore, on Thursday, the US jobless claims were lower than the market was expecting with a print of 216,000 versus the 234,000 expected. Both of these higher prints naturally lifted the dollar and lifted yields higher. This hindered the gold upside last week.

Therefore, the best opportunity will come from a miss in the US inflation data due out at 1:30 UK time on Wednesday. If the headline comes in below 3% and the core reading comes in below 4%, then markets should send yields lower and the dollar lower on optimism that the Fed is winning the inflation battle. In turn, this should lift gold prices.

Major trade risks

The obvious trade risk is that we don’t get a low inflation print. If inflation remains high, then yields can keep gaining. The dollar can remain high and gold prices can stay pressured. The other risk is if the inflation print comes in lower, but markets still fear an inflation rate that is double the Fed’s, 2% target. This has the potential to keep USD bids and yields falling, so there are risks, as always, with this outlook.