Update: Gold recovered traction early on Wednesday, moving away from a near three-week low hit the day before. The XAU/USD kept its bid tone during the European session, hovering close below the $1,800 barrier. Concerns about the rising number of COVID-19 cases in Europe and the reimposition of lockdown measures aided the safe-haven precious metal. Also, falling US Treasury bond yields aided the non-yielding yellow metal, though hawkish Fed views and a stronger dollar limited gains.
Fears of persistently high inflation have led markets to price in a Fed rate hike by July 2022. Moreover, the Fed funds futures suggest another hike by November. The market reacted positively to Jerome Powell’s re-election as Fed chair on Monday. Growing market acceptance of an early Fed policy tightening helped the USD stay near a 16-month high. This should serve as a drag on dollar-denominated gold, cautioning bullish traders. The recent fall from the $1,877 region, or a multi-month high achieved last week, should be confirmed by significant follow-through buying.
Gold (XAU/USD) is trading near a three-week low, near $1,790, after a four-day decline that brought the quote below the 200-DMA. Despite the Fed’s current inaction, higher yields and expectations of a Fed rate hike weigh on metal prices.
President Joe Biden’s choices for Fed Chairman and Vice-Chair strengthened the market’s confidence for a rate hike. Also, the 10-year Treasury rates and the USDX re-entered the multi-day peak. Concerns about a new wave of eurozone debt favoured bond rates and the dollar.
Given Powell and Clarida’s cautious optimism about monetary policy tightening, hopes for a speedier Fed rate hike grew, favouring yields and the DXY. After that, mixed US PMIs spurred a gold bounce.
The US Markit PMIs for November were mixed, with the Manufacturing index outperforming forecasts but not the Services index, which dragged down the Composite data. Also, the US Richmond Fed Manufacturing Index rose to 5 in November, but remained below the prior 12 readings.
Even still, 10-year breakeven inflation expectations, as measured by the St. Louis Federal Reserve (FRED) statistics, rose to 2.62 percent by the end of Tuesday’s North American session.
In the midst of these moves, US 10-year Treasury yields rose five basis points (bps) to 1.676 percent, while the DXY re-entered a 16-month high at 96.61 before settling around 96.50. Notably, Wall Street benchmarks ended mixed, with S&P 500 Futures edging lower by press time.
A crowded economic calendar ahead of Thanksgiving Day will keep gold traders busy, but the bears will likely hold the reins. October Durable Goods Orders, the second estimate of Q3 GDP, the latest FOMC Meeting Minutes, and October core PCE inflation are critical catalysts.
Technical analysis
Gold bears hold reins below 200-DMA, implying more fall targeting an upward sloping support line from late September at $1,780.
As the RSI line falls rapidly into oversold territory, the gold bears may be challenged by the 61.8 percent Fibonacci retracement of August-November upward and a trend line support from early August, respectively $1,760 and $1,755.
To entice short-term buyers, a correction must hold above the 200-DMA at $1,792, as well as the 38.2% Fibo at $1,805.
Even so, July and September tops around $1,834 pose a challenge to gold bulls.