What next for gold after hefty reaction to FOMC meeting What next for gold after hefty reaction to FOMC meeting What next for gold after hefty reaction to FOMC meeting

What next for gold after hefty reaction to FOMC meeting

Ole Hansen

Head of Commodity Strategy

Summary:  Gold suffered its biggest drop in five months yesterday after the FOMC signaled it would speed up its expected pace of policy tightening. Being the most interest rate and dollar sensitive commodity the yellow metal suffered as the dollar and US real yields both reached two-month highs. Looking ahead continued dollar strength will pose a challenge while gold should be able to withstand rising yields as long it is driven by rising inflation expectations.


Gold suffered its biggest drop in five months yesterday after the FOMC signaled it would speed up its expected pace of policy tightening. Markets were surprised at the scale of the adjustment to the Fed policy forecasts and treasury yields backed up steeply, spooking risk sentiment and taking equities lower, gold sharply lower and sending the USD spiking sharply to the upside.

The headline in today’s podcast says it all: “Time to smell the coffee: The Fed tightening cycle has begun” Although the dot plot is not signaling any rate hikes before 2023, the fact  the Fed suddenly signaled willingness to consider tightening was something the non-yielding investment metals struggled to deal with and as a result gold, already on the defensive after getting rejected above $1900, broke down through several key technical support levels.

Gold remains the most interest rate and dollar sensitive commodity, and while the dollar reached a two-month high, it was the movements in Treasury yields that spooked the market. While acknowledging inflation is rising the Fed only lifted their 2022 and 2023 projections by 0.1% to 2.1% and 2.2% respectively. The firm belief inflation will be transitory helped drive a 10 basis point reduction in 10-year breakeven yields. With nominal yields at the same time rising by 10 basis points, most of the damage was seen in real yields which jumped 20 basis points to -0.75%.

While dollar strength will pose a challenge, gold should be able to withstand rising yields as long it is driven by rising inflation expectations. That was, however, not what we saw yesterday, so once again the million dollar question is whether inflation will be a passing phenomenon or longer lasting. For now the market trusts the judgement of the Federal Reserve and until data potentially proves them wrong, gold and with that also silver may face another challenging period.

Gold which wasn’t trading robustly in the days leading up to yesterday’s FOMC meeting took a tumble from the simultaneous moves in dollar and yields. The break below the 200-day moving average at $1838 opened the floodgates with $1825 offering no support before seeing two-way activity close to the next key level just below $1800. With RSI’s getting close to oversold, thereby signaling most of the capitulation selling is done, the $1798 to $1770 range is an area that needs to hold and attract fresh buying in order to avoid a return to the March double bottom. Resistance at $1825, today’s high followed by the mentioned 200-day moving average level at $1838.

Source: Saxo Group

Disclaimer

The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.