XAU / USD bounces off $ 1,700, but negative bias remains intact

• XAU / USD bounced off $ 1,700 on Wednesday, but continues to trend downward.
• Gold was unfazed by the soft US data, but will pay attention to the Fed’s Powell on Thursday and NFP on Friday.

Gold bears regained control on Wednesday, with spot prices (XAU / USD) resuming its steady decline and posting fresh seven-month lows for the second time this week, just above $ 1,700. However, the psychological level has proven to be a strong area of ​​resistance, with XAU / USD bouncing to trade closer to $ 1,720. Still, on the day it trades on gold with losses of around 1.2% or around $ 20.

Bearish data from the US did little to help the precious metal, implying that risks may be tilted lower ahead of Friday’s official labor market report. A strong number could see gold slide below the big figure and open the door for an extension of the downside towards resistance in the $ 1,660-70 region.

Performance of the day

Precious metals markets are taking a hit amid renewed upward pressure on US government bond yields. 10-year yields are currently over 6bp higher on the day at just under 1.48 % and almost eclipsed 1.50% earlier in the session. Yields on the 10-year TIPS (the 10-year yield adjusted for inflation expectations) were also up about 5 basis points on the session to -0.75%, although this is roughly where the week started.

Higher bond yields tend to reduce the relative attractiveness of allocating capital to precious metals, hence the weakness of gold. The fact that inflation expectations have returned to the highs of the cycle, with the 10-year benchmark above 2.20% for the first time since mid-February, has not come to the rescue of gold; markets remain confident that the Fed has inflation under control. Any feeling that they are losing control of inflation would, of course, be very optimistic for gold (the maximum hedge against inflation), but it is a long way off.

How high will the Fed allow bond yields to rise?

This is a hotly debated topic on Wall Street right now, with most desks agreeing that the Fed is likely to act if 10-year yields rise to the 2.0% level. In terms of how they might act, Fed officials have noted that their first option would likely be to extend the weighted average maturity of their bond purchases – that is, buy longer-term debt rather than short-term debt, given that the latter is seen as “well anchored” amid expectations of low interest rates for at least the next three years. Note that this is often called a “turn” operation.

If the foregoing failed to keep bond markets under control, the Fed could resort to increasing the pace of monthly treasury purchases or implementing a policy to control the yield curve like the RBA or the BoJ. However, this would not be the Fed’s preferred option, as following either of these routes will make it difficult to free markets from stimulus without triggering a backlash when the time comes to start tightening policy in the future.

Fed Chairman Jerome Powell will speak to the WSJ on Thursday, with his remarks scheduled to be released at 5:05 PM GMT and traders will be on the lookout for more information on all the topics discussed above. In terms of what all of this means for gold; The more inclined the Fed is to intervene in bond markets and keep yields low. However, the risks appear to be on the downside in the near term for gold, given that for the Fed to act with adjustments or more QE, yields will likely have to rise much higher, which in itself is a big negative for gold.

Technical Levels