Gold gains strength as Treasury yields decline ahead of Fed decision

  • The price of gold recovers decisively after falling for two days.
  • XAUUSD is approaching strong resistance that lines up at $1,840.
  • The reaction of US Treasury bond yields to the Fed’s policy decisions could affect the valuation of gold.

the price of gold It took a sharp turn from the monthly low touched at $1,805 on Tuesday and rose above $1,830 on Wednesday. The short-term technical picture suggests that sellers are staying on the sidelines for now, but the XAU/USD it might struggle to attract buyers unless it breaks above $1,840.

US Treasury bond yields fall
Having gained nearly 10% this week, the 10-year US Treasury yield reversed course on Wednesday and was last seen losing more than 3% on a daily basis. The dollar index is also off the multi-decade high it hit at 105.65 on Tuesday, helping XAU/USD retain its bullish momentum ahead of the expected FOMC policy announcements.

The price of gold will react strongly to the Fed

The Federal Reserve is expected to raise interest rates in June. Although the market consensus points to a 50 basis point (bp) rate hike, reports earlier this week suggested a 75 bp rate hike was likely at this meeting. According to CME Group’s FedWatch tool, markets expect a total rate hike of 150 basis points in the next two meetings. A hawkish monetary policy decision should boost yields and weigh on gold, and vice versa. In anticipation of this development, “buying the dips” in stocks has become one for the US dollar,” said FXStreet analyst Yohay Elam. “The Fed’s June 15 decision will likely include several visceral twists, And I think the dollar would be able to digest every move and come out on top.”

Jerome Powell, Chairman of the FOMC

The European Central Bank (ECB) held an emergency meeting on Wednesday to address the issue of fragmentation. “The Governing Council decided that it will apply flexibility in the reinvestment of repayments due in the PEPP portfolio, with a view to preserving the functioning of the monetary policy transmission mechanism,” the ECB stated. XAU/EUR gained more than 1% as long-term German government bond yields fell sharply and provided an additional boost to the positively related XAU/USD.

Earlier in the day, upbeat macroeconomic data releases from China eased concerns about the prospects for gold demand in mid-week. In annual terms, China’s industrial production grew 0.7% in May, beating market expectations for a 0.7% contraction. Additionally, retail sales fell 6.7% in the same period, beating analysts’ estimate of a 7.1% decline.

Meanwhile, US retail sales fell 0.3% on a monthly basis in May, the US Census Bureau reported on Wednesday. Other data revealed that the Federal Reserve Bank of New York’s Empire State Manufacturing Index improved to -1.2 in June from -11.6. Following mixed US data, Wall Street’s main indices remain on track to open in positive territory, which could cap dollar gains.

Gold Price Technical Outlook

The price of gold rose above $1,830 during European time on Wednesday and the RSI on the daily chart rose towards 50, suggesting that the buyers want to take control. However, to the upside, the 200-day SMA forms a major resistance at $1,840. To attract more buyers, XAU/USD needs to turn that level into support. In that scenario, further gains could be seen towards $1,850 (20-day SMA) and $1,860 (static level).

On the other hand, it seems that a strong static support has formed at $1,810. If the dollar’s rally is accentuated by the Fed’s interest rate outlook, gold could test this level and look for $1,800 (psychological level).

Source: Fx Street

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