Gold Price Analysis: XAU/USD vulnerable following bullish FOMC minutes

  • Gold prices are under pressure as the USD continues to run higher. 
  • Upbeat assessments from the FOMC for 2021 could continue to weigh on gold prices.

Gold is currently trading at $1,772.67 and down some 1.2% at the time of writing following the release of the Federal Open market Committee's Minutes of the January 26-27 FOMC meeting.

The price of gold has continued to deteriorate in the wake of renewed US dollar strength and higher US yields at the same time US data continues to improve.

The risk-on sentiment is damaging the allure of gold prices pertaining to a faster than expected covid vaccine and confidence on Main Street as the vaccine roll-out progresses in a positive direction. 

The Federal Open market Committee's minutes reflected their downbeat analysis of the economic performance leading into the FOMC 26-27 meeting vs their upbeat mood towards a ''considerable stronger outlook for 2021 relative to the December forecast''. 

Key notes from the minutes

Besides the bearishness around the past economic performance, the emphasis should be on what the staff have to say about the future because markets are forward thinking. 

''Staff forecast incorporated effects of Dec stimulus with an assumption of additional fiscal support in the coming months.''

''With regard to upside risks, some participants pointed to the possibility that fiscal policy could turn out to be more expansionary than anticipated, that households could display greater willingness to spend out of accumulated savings than expected, or that widespread vaccinations and easing of social distancing could result in a more rapid boost to spending and employment than anticipated.''

Then, there is current attention to inflation and US yields in the markets at the moment. 

''The 12‑month changes in total and core PCE prices in coming months were projected to briefly move above 2 percent in the second quarter of 2021 as the unusually low observations from the spring of 2020 drop out of the 12-month calculation. Following these swings, inflation was expected to finish the year at just below 2 percent. Thereafter, inflation was projected to gradually edge up to 2 percent by the end of the medium term as labor and product markets tightened. With monetary policy assumed to remain accommodative, inflation was projected to moderately overshoot 2 percent for some time in the years beyond 2023.''

Gold's reaction

The price is on fragile grounds following the release as the US dollar perks up and US yields remain in bullish territory, albeit somewhat underwater on the day as they correct from the weekly highs scored earlier in the week. 

Volatility and USD strength are the two main themes in FX and commodity markets, and while US bond yields have come back a tad, they remain elevated and underpin the greenback and weigh on the yellow metal.

What this means is that markets are starting to price in a taper from the Federal Reserve.

However, analysts at TD Securities reminded that the Fed has reiterated that it is not even started talking about taper or the exit anytime soon.

''Nonetheless, after a multi-month lull, real rates are now headed in the direction that could threaten risk assets,'' the analysts said.

Key comments:

''Such is the nature of the balancing act being played by the Fed.''

''The central bank is testing rates market, which could in turn test sky-high market valuations, which could ultimately test the Fed's resolve to maintaining a reactive rather than proactive approach. In this sense, we suspect pressure will build at the Fed to push back against taper talk, but in the meantime, the rise in real yields has lowered the bar for gold prices to break below their months-long support.''

''With gold positioning still crowded, the hurdle for a shakeout in gold is razor-thin.''

Upbeat US data weighs on gold

Meanwhile, US data has been flowing on Wednesday and the upbeat outcomes have also underpinned the greenback and weighed on the precious metals. 

The US January Producer Price Index was much stronger than expected, rising 1.3% MoM compared with 0.3% in December and expectations of a 0.4% increase.

The core PPI rose 1.2% MoM, raising concerns about mounting pipeline inflation pressures. The rise in the PPI was the largest since the index began in 2009.

January US Retail Sales also surged 5.3% MoM.

Meanwhile, January US industrial production was strong, rising 0.9% MoM with manufacturing output up 1.0% MoM.

Gold technical analysis

Further to the prior analysis, Gold Price Analysis: Bears need break of current support for $1,765 target, the price of gold is continuing to run towards the $1,765 level with a low so far of $1,769.65.

The original analysis was made way back on 9. Feb: Gold Price Analysis: Bears to target a run to weekly support at $1,765

Prior analysis, weekly, 4-hour and 1-hour 

Live market, hourly 

As illustrated, the market has moved in harmony with the prior analysis across the time frames and has respected the market structure all of the way. 

Meanwhile, we have the last structure left to play out on the hourly chart where a 61.8% Fibonacci retracement of the latest hourly impulse has acted as a resistance. 

This offers a -272% Fibonacci retracement of the correction's range to the $1,765 target and the price is already well on the way there. 

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