US 10-year yield could fall to 1.8%, pushing Gold higher to USD 1220/Oz

Washington (Feb 26)  Following the Fed chairwoman Janet Yelle’s two-day semi-annual testimony, Gold prices have recovered to trade at USD 1220 from the low of USD 1190.00, while the 10-year yield in the US has declined from a high of 2.164% to trade at 1.95%.

 Rate hike bets pushed out in 2015

Fed chief Yellen, in her testimony, stated that the policymakers are in no rush to hike the interest rates at least for the next couple of meetings. With weak inflation eyed in the short-term coupled with slack in the labor market, the policymakers want to wait for more evidence on the economic recovery before making a move.

Consequently, the markets believe the June rate hike is off the table. The likelihood of a major change in tone in the March meeting is also low as it is widely expected to mirror the testimony text. Hence, the positions in the Treasury markets were adjusted accordingly, leading to a fall in the 10-year yield to 1.95%. Given the inverse relationship with yields, Gold recovered to a high of USD 1220.

However, markets still firmly believe that the Fed would raise interest rates in Q4 2015, due to which Gold as well as the treasury prices have been unable to make substantial gains. Furthermore, the risk of Grexit is non-existent, at least for the next four months, while the recent data out of the Eurozone has been encouraging.

Hence, both the assets are awaiting fresh cues in the form of US CPI and Q4 GDP data due for release later today and on Friday.

Weak US CPI – The year-on-year CPI in the US is seen falling by 0.1% in January, compared to the 0.8% rise in December. The negative CPI as expected or a weaker-than-expected print shall re-enforce Fed’s “patient” view, resulting in further losses in the 10-year Treasury yields and gains in the yellow metal. Given the sharp fall in the energy prices in the last quarter of 2014, the CPI is likely to be weaker-than-expected. The data earlier this month has also shown retail sales remain anemic despite fall in the energy prices and strong labor market gains. Thus, a weaker-than-expected print could weigh over Treasury yields.

US GDP seen lower – The second estimate of the US Q4 GDP is seen lower at 2.1%, compared to the initial estimate of 2.6%. The expected growth rate of 2.1% marks a sharp slowdown from the previous quarter’s growth rate of 5%. A weak GDP print would support Fed policymakers’ view that prices more evidence of growth is needed before raising the interest rates.

Hence, the 10-year yield in the US could dip to 1.8% in the short-term, while Gold prices could test USD 1240/Oz levels. The 10-year yield failed to sustain gains above the weekly falling trend line resistance at 2.05%. The yields could find some support if the Eurozone GDP data due for release tomorrow shows recovery in growth. However, a weak US CPI and GDP data are likely to keep yields under pressure.

Gold prices could rise sharply once the 50.00% Fib retracement of of the up trend from the low of USD 1131.9 (Nov. 7 low) to USD 1307.3 (Jan. 22 high) located at USD 1219.6 is taken out. A weak CPI print today, coupled with the drop in the Treasury yields could help the metal close the North American session today above the USD 1219.6 mark. Once the resistance is taken out, prices can rise sharply to the weekly 10-MA at USD 1234 and 38.2% retracement seen at USD 1240.00.

However, both, Gold and Treasury yields are at a risk of better-than-expected CPI data (higher than -0.1%) and Q4 GDP better than the initial estimate of 2.6%. In such a case, the 10-year yield could make a run at 2.05%, while the Gold prices could dip to USD 1200 levels.

Source: FXstreet