XAU Rebound is Likely a Fake-out as US Dollar, Fed Pressures Mount

Gold, XAU, Market Sentiment, Rates, US Dollar, Fed, Inflation – Talking Points

• Gold Prices are slightly higher after a modest overnight recovery amid equity volatility
• The outlook for bullion prices faces mounting pressures, including the Fed and US Dollar
• 1,900 level may prove key to direction, with a break possibly sparking a deeper selloff

Gold prices rose above the 1,900 level overnight, but that hasn’t inspired much confidence in the yellow metal following a sharp drop earlier this week. The Fed’s rate hike path has firmed up in recent weeks, pushing rates higher to bullion’s expense. The market has responded in a risk-off fashion, pushing equity prices lower. The fact that gold hasn’t responded to the risk-off backdrop reflects the worsening backdrop for prices.

Instead, investors have flocked to the US Dollar, pushing the DXY index to its highest level since March 2020 and within 1% of the 2016 highs. At the same time, market-based inflation expectations have cooled. Both of those are headwinds for gold, compounding gold’s negative outlook further. The US 1-year breakeven rate – a proxy for where the market sees inflation one year out – is trading near its lowest level since February at just above 5%. That gauge was over 6% just a month ago when gold was trading at 1,958.

The fact that gold hasn’t rebounded despite a major pullback in US equity prices and broader risk-off flows poses a big concern moving forward. A drop in real yields, usually a tailwind, didn’t provide enough juice for more than today’s very modest bounce. That said, gold doesn’t appear to be an appealing asset to own in current conditions and traders appear to be staying away for good cause. The Fed policy decision next week is also unlikely to change the outlook, given that the announcement will likely confirm the hawkish pivot seen over the past several weeks.

Gold Technical Forecast

Gold is holding above the 1,900 level after prices briefly dipped under the psychologically important level following a big drop earlier this week. If bears manage a clean break below that level, it would likely open the door for prices to continue sliding. The 100-day Simple Moving Average (SMA) would quickly shift into focus if that occurred, with a deeper drop looking at the 200-day SMA near 1,833.

Gold Daily Chart

Chart created with TradingView

— Written by Thomas Westwater, Analyst for DailyFX.com

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