Gold eased from three-week highs on Thursday as a recovery in the dollar prompted some buyers to cash in gains after the previous day’s sharp rally, but remained supported by fading expectations for a Federal Reserve interest rate hike.
The metal surged 1.5 per cent on Wednesday after below-consensus U.S. payrolls data and dovish comments from Fed chair Janet Yellen dampened expectations for an imminent hike.
Gold is highly sensitive to rising rates, which lift the opportunity cost of holding non-yielding bullion, while boosting the dollar, in which it is priced.
“Gold is holding up as traders have taken a very relaxed approach with Janet Yellen’s recent comments,” Naeem Aslam, chief market analyst at ThinkForex, said. “The view is that the Fed may not be increasing the rate this summer at all.”
The dollar, which slipped to a five-week low against a basket of currencies on Wednesday on fading expectations for a hike, regained some lost ground on Thursday, pressuring gold.
“While there is likely further room to the upside for gold, there may be some road blocks to the rally near term,” HSBC said in a note. “We expect that as the FOMC (Fed policy meeting) approaches, trading volume may quieten down and some near term traders will book square and take profits.”
“There is always the possibility the Fed surprises the market and raises rates, which could rapidly reverse gains.”