Gold, XAU/USD, FOMC, Treasury Yields – Talking Points
- Gold drops over 2.5% after a shift in Federal reserve’s dot plot projections
- Spike in outlook-sensitive 5-year Treasury yield propels US Dollar higher
- XAU/USD at critical support after breaking below a key moving average
Gold prices sank over 2.5% overnight – the largest drop since January – after the Federal Open Market Committee’s (FOMC) two-day policy meeting concluded with a less dovish, and arguably even hawkish, policy shift. While the Fed didn’t provide any clear timeline for tapering the balance sheet, the Fed’s dot plot, used to illustrate members’ rate projections, showed a median consensus for two rate hikes in 2023.
The Treasury and foreign exchange markets were the main drivers against gold prices following the FOMC decision. Treasury yields moved higher across the curve, with the rate-sensitive 5-year cranking nearly 10 basis points higher. Federal Reserve Chair Jerome Powell attempted to assuage markets in Wednesday’s press conference, saying, “we’ll give advance notice before announcing any (taper) decision.”
The Fed is more likely than not to take a well-balanced and patient approach to scaling back its balance sheet should the recovery remain absent of any further shocks. As traders digest Powell’s words, that sentiment may solidify and lead to bonds recovering in the coming days. That would likely result in the US Dollar weakening as foreign capital inflows slow without the lure of higher rates.
Gold Versus 5-Year Treasury Yield
Chart created with TradingView
XAU/USD Technical Outlook
Gold sliced through a former level of resistance and proceeded to drop below its 200-day Simple Moving Average (SMA) before stopping short of the 1800 psychological level at a former area of resistance turned support. MACD is moving sharply lower with no signs of slowing down. However, the Relative Strength Index (RSI) is attempting to rebound back above its 30 oversold level.
Given the large drop, bulls may need to wait for more hands to shake out before attempting to make a decisive move higher. That said, price may consolidate in the coming days before the next directional move. To the downside, the 1800 level and the 100-day SMA will serve as potential support. Alternatively, the 200-day SMA will be resistance to the upside.
XAU/USD 8-Hour Chart
Chart created with TradingView
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--- Written by Thomas Westwater, Analyst for DailyFX.com
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