FOMC December Minutes Preview: Gold at the mercy of US T-bond yields

The US Federal Reserve will release the minutes of its December policy meeting on Wednesday, January 5, at 1900 GMT and investors will look for fresh insight into the rate outlook.

At that meeting, the Fed announced that they had decided to double the pace of the asset taper to $30 billion per month from January. At this pace, the quantitative easing program will end in mid-March. The updated Summary of Economic Projections, the so-called dot plot, revealed that the median view was for three rate hikes in 2022. During the press conference, FOMC Chairman Jerome Powell noted that it would not be appropriate to hike the policy rate while the taper was still ongoing, indicating that the earliest the first hike could occur was in March.

Source: federalreserve.gov

Following the Fed’s policy announcement, the benchmark 10-year US Treasury bond yield stayed relatively quiet and fluctuated in a tight range below 1.5% for the remainder of the month. At the same time, gold gained 2% and ended the year at $1,830. 

With market conditions normalizing following the Christmas and the New Year holidays, however, US T-bond yields gained traction and the 10-year reference climbed to its highest level since late November above 1.6%. 

In a move that reassured investors the inverse correlation between the 10-year yield and gold remains intact, XAU/USD fell sharply and lost more than 1% on Monday, January 3.

According to the CME Group’s FedWatch Tool, investors are pricing a 61.3% chance of a rate hike in March, compared to 25.9% a month ago. There is a risk the Fed’s publication could prompt a rise in the March rate hike probability, and if so yields could continue to push higher and weigh on gold. Market participants will want to make sure that policymakers see the March meeting as a “live meeting” during which the first rate hike in three years could be enacted. On the other hand, a dovish tone is likely to force bond yields to turn south and trigger a rebound in XAU/USD. 

Source: cmegroup.com

Gold Technical Outlook

Despite Monday’s steep decline, gold managed to hold above the critical $1,800 handle, where the 200-day SMA meets the Fibonacci 50% retracement of the uptrend that started in October and ended in mid-November. The Relative Strength Index (RSI) indicator on the daily chart is moving sideways near 50, suggesting that the pair is currently moving in a consolidation channel. 

For the 10-year US T-bond yield, 1.7% aligns as resistance and a move beyond that level could cause XAU/USD to break lower and fall toward $1,790 (100-day SMA) before $1,780 (Fibonacci 61.8% retracement). 

On a dovish surprise, gold could regain its traction and meet first resistance at $1,815 (Fibonacci 38.2% retracement). If sellers fail to defend that level, the next target on the upside could be seen at $1,830 (December 31 high) before $1,835 (Fibonacci 23.6% retracement).