Gold outlook: Crude oil, bond yields exert pressure on XAU/USD ahead of FOMC

Gold has fallen relatively sharply in the first half of today’s session. Hardly a surprise, truth be told. The ongoing macro backdrop is bearish for gold and risk assets in general. Rising oil prices are continuing to pile pressure on government bonds, causing their yields to increase. Rising yields, in turn, increase the opportunity cost of holding assets that pay zero interest, not to mention storage and insurance costs. Thus, until such a time that the US dollar debasement trade comes back to focus, or the greenback takes a drop, fiat alternatives like gold and bitcoin could remain under pressure - especially in challenging risk environment. With the Fed decision due on Wednesday and the macro backdrop turning far from ideal, the balance of risks still appears tilted to the downside in the near term gold outlook.

 

Gold starts the week on the back foot

 

Momentum has also played a part in today’s price action. The metal had already conceded a hat-rick of weekly declines, suggesting that the powerful momentum behind August’s rally has largely run its course.

 

On Friday, gold initially fell after the US CPI data, only to rebound sharply from its lows almost immediately — a classic “sell the news” reversal — before giving back much of the recovery into the close, albeit still closing some 0.7% higher. Those gains have since more than evaporated. Once again, the bulls were trapped.

 

The big question now is whether there will be an even larger episode of liquidations on the way, with those who bought the dip around $4,000 in August likely to be squeezed.

 

Key levels to watch

 

Resistance around $4,400 once again held, despite several attempts to break above it in recent sessions. Until that ceiling gives way decisively, the bears retain the upper hand.

 

A return towards $4,100 is therefore quite plausible, potentially around Wednesday’s Fed decision. A sustained break below that level would put $4,000 in focus, followed by the June low around $3,942.

 

 

If the dollar-debasement trade comes back into fashion and gold can clear $4,400 convincingly, the focus would shift towards $4,500.

 

Beyond that, the 200-day moving average at roughly $4,538 becomes the next obvious technical hurdle, ahead of resistance around $4,600.

 

Fed decision is the next test

 

So, technical momentum points to the possibility of further losses before the FOMC meeting. The decision itself may not prove so pivotal, but any hints of future hikes could hurt gold and support the dollar. The latest inflation data and warnings from Kevin Warsh that inflation could remain above target for longer than policymakers would like, have all but cemented expectations of a 25 bp hike on Wednesday. It would be a big - a massive - surprise if the Fed delivers anything else but that in terms of the rate decision itself.

 

For gold investors and the wider financial markets, the more important question is what comes next. A rate hike that is clearly a one-off would be very different for gold from the start of another tightening cycle.

 

Oil and yields remain the driving force for now

 

The renewed surge in oil prices is the most obvious issue for not only gold, but stock indices and major FX too. Precious metal prices have already eased, but the prospect of an even larger correction should not be ruled out.

 

After all, Treasury yields are not moving in the right direction. The 10-year yield came close to 5% last week, a level that may encourage some profit-taking, but the bigger story remains the persistent upward pressure on borrowing costs.

 

For gold, this is a combination that is not very ideal. Higher real yields increase the opportunity cost of holding a non-yielding asset, while a more resilient dollar thanks to rising energy prices removes another source of support.

 

Gold outlook remains tilted lower

 

For now, therefore, most macro influences and technical indications point south. The market is dealing with higher oil prices, rising Treasury yields, persistent inflation concerns and a dollar that is showing signs of regaining its footing.

 

Unless the dollar-debasement narrative makes a meaningful comeback, the path of least resistance will likely remain to the downside for gold. Wednesday’s Fed decision could determine whether that weakness develops into another leg down — or whether gold finally finds a catalyst capable of turning the trend around.

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R