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Rising bond yields and the dollar will likely remain key areas of focus for investors this week. The ten year note yield has been flirting with the three percent yield level, and has already caused some significant investor anxiety and market volatility.

After trading in a range from 88 to 90 or so, the dollar index has put together a bit of a rally in recent sessions, pushing prices to almost 91.50. Whether or not the recent run higher is sustainable is another question. 

The dollar has been propped up by higher yields and an unwinding of the short dollar trade, which had gotten considerably crowded. Although higher yields may provide some support for the currency, a swift reversal in yields also has the potential to bring the dollar right back into its previous range, or even lower.

Wednesday’s FOMC meeting announcement could potentially have a significant impact on both yields and the dollar. No action is expected from the central bank at this meeting, however, investors will be very interested in the central bank’s statement. Markets have now priced in three additional rate hikes in 2018, while the Fed sees only two. A hawkish tone in the central bank’s commentary could set the stage for a June rate hike, fueling further dollar upside in the process. Such a scenario could potentially have a knee-jerk, negative impact on gold prices. A lack of any hawkish rhetoric, or even a more dovish tone, however, could take the wind from the dollar’s sails and fuel buying in hard assets like gold.

Following the FOMC meeting, investors will then turn their attention to Friday’s non-farm payrolls data for April. The economy is at or near full employment, and investors will likely be more concerned with wage data as opposed to the headline number. Rising wages could point to further economic strength, and the potential for a faster rate of  monetary policy normalization. Higher wages would also indicate that inflationary pressures are on the rise, which could be considered very bullish for gold.

Further signs of inflation could keep upward pressure on bond yields. If the benchmark ten year note is able to maintain a yield of three percent, positive economic data could potentially send yields sharply higher in short order. Some analysts have already suggested that a 3.5 to 4 percent yield is likely in the cards in the months ahead.

Although higher yields may have weighed on gold in recent weeks, an ongoing move higher in rates could potentially be a major bullish catalyst for gold. The only reason the Fed would look to become significantly more aggressive with rates is if falls behind the inflation curve. If that proves to be the case, investors could seek out hard assets like gold to provide a hedge against rising prices and a decline in purchasing power. Not only that, but higher rates may pressure stocks, as more attractive yields compete for investor capital. Much of that capital could, however, find its way into the gold market as investors seek out alternatives with more potential upside.