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  • Gold has been on the back foot in recent trade, with spot prices breaking below last week’s $1720s-$1740s range.
  • Quarter-end flows, US data and President Biden’s infrastructure announcement are going to be the key drivers this week.

Spot gold (XAU/USD) prices have been on the back foot in recent trade, with spot prices breaking to the south of last week’s $1720s-$1740s range, though remaining supported to the north of the $1700 level. That means that finally, after seven sessions of being locked within a few dollars of it 21-day moving average, XAU/USD appears to have dropped back away from this level. For reference, the 21-day moving average sits just above $1724. To the downside, gold bears will be eyeing a test of the psychological $1700 level, which happens also to coincide with the 12 March lows. Beyond that, the annual lows sit at just under $1680 and were set back on 8 March.

Driving the day

Not a great deal of new news for financial market participants to get excited about, or at least not anything that will significantly change the outlook for monetary and fiscal policy in the US and the US economy’s growth outlook (naturally, these are key drivers of XAU/USD). But these drivers will be coming later in the week; US President Joe Biden will give more details on his (touted to be) multi-trillion Recovery package. The White House has said that the package is going to be unveiled in two halves with the first to focus most heavily on infrastructure – this ought to support the narrative of a strong US economic recovery in 2021 and likely throughout Biden’s first term as President.

The above narrative has support USD as of late and put upwards pressure on long-term US government borrowing costs, two factors that are typically a negative for precious metals. With market participants becoming increasingly bullish on the US dollar as the US economic outlook begins to look increasingly favourable versus the global economic outlook and the Fed seemingly having gone well past peak dovishness, many analysts are becoming increasingly bearish on gold.

But the US economy may face some bumps in the coming months which could hurt USD and push yields lower if unfavourable events 1) hurt growth expectations for 2021 and 2) encourage a more dovish than expected Fed – such an occurrence could be a third wave of the Covid-19 virus; over the last two weeks, new infections are up in the US as the country struggles to contain the spread of the more transmissible and deadly UK strain of the virus. However, with the most vulnerable in the country now having been vaccinated, a return to the full-scale lockdowns seen in the past seems unlikely. Either way, a third wave could provide some much-needed impetus for the gold bulls, even if only in the short-term.

Other risk events to note this week include 1) unpredictable quarter-end rebalancing flows, 2) the March ISM manufacturing PMI survey on Thursday and 3) an unusual US NFP release; the latest jobs report is being released on a US (and European) market holiday, meaning there will be very few market participants to trade the reaction to the data. Volatility in overseas markets is likely to be very high given very thin liquidity and such volatility is likely to spill-over into the reopening of US and European markets next week. Stronger than expected US data could reinforce the above-mentioned narrative of a strong US recovery, which is unlikely a positive for gold.