Gold price struggles to build on recovery gains amid rising US bond yields
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Haresh Menghani
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19 Dec @ 03:28 (GMT+0)

Gold price struggles to build on recovery gains amid rising US bond yields

  • Gold price attracts some haven flows amid the post-FOMC sell-off in the equity markets. 
  • The Fed’s hawkish outlook continues to lift the US bond yields and caps the XAU/USD.
  • Traders look to the US Q3 GDP for some impetus ahead of the US PCE data on Friday. 

Gold price (XAU/USD) trims a part of its intraday recovery gains and trades just above the $2,600 mark, still up over 0.40% for the day heading into the European session on Thursday. The Federal Reserve's (Fed) hawkish outlook on Wednesday remains supportive of a further rise in the US Treasury bond yields to a multi-month peak. This, in turn, assists the US Dollar (USD) to stand firm near a two-year high and turns out to be a key factor acting as a headwind for the non-yielding yellow metal.

Meanwhile, the Fed's signal that it would slow the pace of interest rate cuts comes on top of persistent geopolitical risks and trade war fears, which, in turn, tempers investors' appetite for riskier assets. This might continue to drive some haven flows and assist the Gold price in preserving its modest recovery gains. Nevertheless, it will still be prudent to wait for strong follow-through buying before confirming that the XAU/USD's recent sharp pullback from over a one-month high has run its course.

Gold price draws some support from the risk-off mood; Fed's hawkish outlook caps gains

  • The Federal Reserve, as was anticipated, lowered its benchmark policy rate for the third time since September and signaled that it would slow down the pace of rate cuts, triggering a sell-off in the US equity markets. 
  • The spillover effect drags Asian stocks sharply lower on Thursday and benefits traditional safe-haven assets, prompting some short-covering around the Gold price and assisting it to rebound from a one-month low. 
  • The so-called dot plot indicated that officials see the fed funds rate falling to 3.9% in 2025, suggesting two more 25 basis points interest rate reductions as compared to the previous forecast of four cuts in September. 
  • In his post-meeting press conference, Fed Chair Jerome Powell said that inflation has eased significantly in the past two years, though it remains somewhat elevated relative to the central bank’s 2% longer-run target. 
  • The yield on the benchmark 10-year US government bond climbs to the highest level since May and assists the US Dollar in preserving the overnight gains to a two-year top, capping the non-yielding yellow metal. 
  • Traders now look forward to Thursday's US economic docket – featuring the release of the final Q3 GDP print and Weekly Initial Jobless Claims – for short-term impetus later during the North American session.
  • The market attention, meanwhile, shifts to the US Personal Consumption Expenditures (PCE) Price Index, or the Fed's preferred inflation gauge on Friday, which will drive the USD and the XAU/USD in the near term.

Gold price technical setup favors bearish traders; the 100-day SMA support breakdown in play

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From a technical perspective, the overnight close below the 100-day Simple Moving Average (SMA), for the first time since October 2023, and the $2,600 mark was seen as a fresh trigger for bearish traders. Moreover, oscillators on the daily chart have just started gaining negative traction and suggest that the path of least resistance for the Gold price remains to the downside. Meanwhile, Thursday's attempted recovery stalls near the $2,618 region, or the 23.6% Fibonacci retracement level of the latest leg down from over a one-month high touched last week. The said area should now act as a pivotal point, above which a fresh bout of a short-covering could lift the XAU/USD towards the $2,635 area, or the 38.2% Fibo., en route to 50% retracement level, around the $2,655-2,656 supply zone. 

On the flip side, the Asian session low, around the $2,584-$2,583 region, now seems to protect the immediate downside. The next relevant support is pegged near the $2,560 area, below which the Gold price could aim to challenge the November swing low, around the $2,537-$2,535 zone. Some follow-through selling, leading to a subsequent fall below the $2,500 psychological mark, might expose the very important 200-day SMA support near the $2,470 region.

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.