Stronger Dollar, Yellen Speech Weigh On Gold

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A stronger dollar and highly anticipated speech Fed Chair, Janet Yellen, could be seeing dragging gold and the SPDR Gold Trust (ETF) (NYSEARCA:GLD) prices lower on Wednesday.

Prices for gold contracts for December delivery pulled back 0.29% in Asian trading and had dipped 0.38% in midmorning trading in Europe after earlier hitting a session low of $1,339.50.

Dollar gains strength

The U.S. dollar index was up about 0.14% to 94.65 early Wednesday. The greenback gained ground against a basket of rivals following Tuesday’s release of upbeat U.S. housing data.  U.S. new home sales rose 12.4% to 654,000 units in July. New home sales declined 2% in the previous month.

EURUSD could be seen trending down 0.22%.

Downbeat economic data coming out of Australia and New Zealand also provided some lift for the dollar against domestic currencies in the two countries. The Australian Bureau of Statistics said that construction work done in the country fell 3.7% in the second quarter, worse than the 1.9% decline that economists predicted.

In New Zealand, the country’s statistics body reported that the trade balance entered a deficit of NZ$433 million last month. Economists were expecting a deficit of just NZ$350 million for July. Trade balance stood at a surplus of NZ$127 million in the prior month.

Yellen speech

The subdued gold prices can also be linked to cautious trading ahead of Yellen’s speech at an annual meeting of central bankers on Friday in Wyoming. Fed chairs have typically used the meeting to provide important policy updates and traders are betting that Yellen will stick to the trend and tell the country when the Fed will make the next interest rate review, or at least change the current probability picture.

At least two influential Fed officials have appeared to support a near-term rate increase, claiming that waiting too long to make the move could be detrimental to the economy. At the end of the Fed’s last policy meeting, the central bank said that near-term pressure on the U.S. economy had diminished and hinted that it will closely pay attention to the quality of economic data being reported before its next policy meeting in September. However, the Fed’s recently released July meeting minutes showed that central bank policy officials are divided on when is the right time to hike lending rates.

Given the cloudy picture surrounding the next rate review, Yellen is widely expected to provide a clue on the interest rate review pathway.

Gold is sensitive to interest rates as higher rates increase the opportunity cost of holding the yellow metal. A stronger dollar also diminishes the appeal of gold among traders holding currencies other than the greenback.

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