Gold Benefits From Risk Appetite Ahead Of Fed’s Decisions

Spot gold (XAU/USD) prices have been under selling pressure in recent trade, dropping from the mid-$1840s prior to the US open to around the $1830 as the Fed monetary policy announcement at 1330GMT looms.

A combination of pre-Fed profit-taking and short-term, intra-day technical selling have been cited as the reason for XAU/USD’s recent drop, with gold not receiving any impetus from subdued FX or bond markets, which are both in their typical pre-Fed lull. Since last week, gold has been supported by an uptrend, but this uptrend broke a few hours back, triggering some technical selling and a drop back to the $1830 support area.

Moving on to the pre-Fed profit-taking; gold has been performing well in recent weeks and is up more than 2.5% from its lows in the $1780 area printed back on the first day of the year. That solid run of recent gains has come despite a US dollar that has been strengthening (over the last two weeks, anyway) and US bond yields, which have remained well support close to multi-month/year highs. The run higher this year in US bond yields (the 10-year is more than 25bps higher on the year already) has come amid increased bets on Fed hawkishness, something that would normally hit gold.

After the concerns over geopolitical tensions in Eastern Europe eased, most investors alternatively focus on the Fed’s awaited monetary policy decisions, thus, gold futures fell largely due to an improvement in risk appetite in financial markets.

Gold futures retreated to 1830 dollars against the daily close recorded in the last trading session at 1847 dollars an ounce. The precious metal contracts surged to highest level during the current trading day at 1850 dollars, compared to the lowest levels recorded at 1829 dollars.

Investors’ interest in money markets is focused on when the Fed starts raising interest rates, when it sets it to start selling assets that were recently purchased and weighed on the central bank’s balance sheet, and when to stop buying assets.

US housing data also showed an improvement after the US new home sales index rose to 0.81 million units last December, compared to the previous reading of 0.725 million units and higher than expectations that indicated 0.76 million units, which led to the addition of more Pressures on gold in addition to the pressures resulting from the state of anticipation of the Fed’s decisions.

The latest batch of corporate earnings reports for the fourth quarter of 2021 indicated that profits from Microsoft and Boeing exceeded market expectations.

Earlier, on Wednesday, gold prices tumbled after the beginning of the American session. XAU/USD broke under 1840$ and quickly dropped to the 1830$ area, reaching the lowest level in two days. It remains under pressure ahead before the FOMC statement.

Probably technical factors weighed on the last leg lower in XAU/USD. The area around 1840$ offered support during several hours. Now the yellow metal is about to test the key $1830 support zone. A break lower would add more pressure, probably accelerating the decline. If XAU/USD holds above $1830, a rebound seems likely. The $1850 zone is the relevant resistance.

Market participants await the outcome of the FOMC meeting. The statement will be delivered at 19:00 GMT and could significantly impact gold prices. “A hawkish hold is widely expected as the Fed sets the market up for liftoff at the next meeting March 15-16. WIRP (Bloomberg World Interest Rate Probabilities) suggests a hike then is fully priced in, as are three more quarterly hikes this year.

There won’t be any updated macro forecasts or Dot Plots for today’s decision, but we expect Chair Powell to send a very clear signal that the Fed is looking beyond recent stock market volatility and instead focusing on the tight labor market.

Markets will be keen to see any clues on how soon the Fed will allow balance sheet runoff. We had thought this would be a 2023 story, but given recent official comments and the Fed’s accelerated timeline, we believe runoff will begin in Q3. Some possible “buy the rumor, sell the fact” price action after the decision could send the dollar lower, and could benefit XAU/USD, particularly if the same behaviour takes place in the bond market.