Gold at a crossroads as greenback and yields rise ahead of key inflation data

Gold finds itself at an interesting inflexion point as we start another eventful week in the markets.

On one hand, the US dollar has been demonstrating strength and pushing higher against other major currencies, while Treasury yields have also been ticking upwards. This dynamic of a strong dollar and rising yields have been putting downward pressure on gold prices.

Last week’s downgrade of the US credit rating by Fitch fueled a spot of risk-off sentiment, despite the Treasury Secretary giving them a good telling-off!

However, here’s the interesting bit – even with the Fed’s tightening cycle, those long-term yields just keep climbing towards 4.20% – hitting peaks not seen since the end of last year. Yet short-term rates seem stuck in place. It’s got some speculating the Fed may be nearing the end of its rate-hiking cycle.

And that dollar strength I mentioned? It’s definitely making headway against other major currencies as investors become more cautious. But gold has managed to stand its ground – for now.

There’s a high degree of uncertainty in the markets presently. Implied volatility on gold prices has ticked higher recently, meaning we could see some dramatic price swings in the precious metal moving forward.

It really comes down to the major US CPI inflation report on Thursday. If the figures show inflation is continuing to cool, it could ease concerns about the Fed getting more aggressive. That would be welcome news for gold investors.

But if inflation surprises on the upside, then look out! We could easily see Treasury yields and the dollar spike sharply higher, which would swiftly knock the wind out of gold’s sails.