Gold Price Bumps Up on Weaker US Dollar and Less Hawkish Fed. Where to for XAU/USD?

 

GOLD, XAU/USD, US DOLLAR (DXY), FED, FOMC, YIELDS – Talking Points

  • Gold has recovered this week as the US dollar softened on lower yields
  • Rate hike expectations might be fully priced judging by recent Fed comments
  • If the Fed is serious about fighting inflation, what’s in store for XAU/USD?

Gold has benefitted from a weakening US Dollar so far this week, as the aftermath of the Fed action from last week continues to ricochet through markets. The US Dollar index (DXY) is down over 1% this week and gold is up around 0.20% over the same period.

While the market got their taper expectations met, the rate hike timeline might not live up to the hype. A number of Fed speakers have come out since the meeting and it’s possible that the 5 hikes for 2022 priced in by the market, may not be delivered.

Overnight we have seen several Federal Reserve board members put a dovish spin on the rate hike cycle.

San Francisco Fed President Mary Daily and Philadelphia Fed President Patrick Harker, see 4 hikes in 2022, while Atlanta Fed President Esther George is looking at only 3 for the year.

Kansas City Fed President Esther George acknowledged that a prompt end to QE may open the way to a more gradual increase in rates. All four Fed speakers appear to be backing away from a 50-basis point lift off at the March FOMC meeting.

Overall, there seems to be a belief within the Fed that one of their goals of full employment has been met. The second objective of inflation near, or just above 2%, has not been met.

This could be detrimental to gold on 2 fronts. Clearly higher nominal yields as a result of the Fed hiking rates undermines the attractiveness of gold, as it does not provide a dividend.

Secondly, if the market believes that the Fed is determined to fight inflation, then longer term inflation expectations will be lowered, which may push real yields higher.

Real yields might hold the key for gold markets. US 10-year real yields have slipped from last week’s peak of -0.50% to around -0.64% today, helping to underpin gold so far this week.

Later today will see US jobs data, factory and durable good orders, as well as some PMI numbers.

GOLD TECHNICAL ANALYSIS

Last week, gold broke below an ascending trend channel that it had been in since mid-December. The move lower broke below all short, medium and long-term simple moving averages (SMA).

It has bounced since making the low at 1780.36 but has been unable to overcome pivot point resistance at 1805.78. The 200-day SMA is also near that level and might also offer resistance.

Further resistance could be at the pivot points and previous highs of 1829.68, 1831.65, 1847.94, 1853.83 and 1877.15.

On the downside, support could be at the pivot points and previous lows of 1780.36, 1778.50, 1761.99, 1758.93 and 1753.10.

Chart created in TradingView

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