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Market update: gold prices in turmoil as treasury yields rebound, and US dollar dominates

Gold prices slump, dragged lower by the rebound in US treasury yields and the strength of the US dollar. The precious metal’s outlook is starting to become less bullish.

Source: Bloomberg

Volatility increased on Tuesday as US markets reopened after Monday's Martin Luther King, Jr. holiday. The trading session saw US treasury rates blast higher, with the 10-year bond climbing above the psychological 4.0% - a move that boosted the US dollar against most peers.

The rally in the US dollar, coupled with soaring yields, also dealt a blow to gold (XAU/USD), pushing its prices more than 1.25% lower on the day, and prompting many investors to reassess the bullish outlook for the precious metal, which became a consensus trade following the Federal Reserve's pivot at its December meeting.

Fed's policy reassessment triggers gold bearish trend

The catalyst for Tuesday's moves was a reassessment of the Fed's monetary policy after expectations shifted away from fundamentals and became extremely dovish recently. Comments from Fed governor Christopher Waller that policymakers should not rush to slash rates until lower inflation can be sustained reinforced market dynamics, further weighing on bullion.

With the US economy holding up exceptionally well and progress on disinflation stalling, the US central bank will be reluctant to ease its stance materially this year, as looser financial conditions could complicate the path to price stability. Once Wall Street recognises this reality, traders could start unwinding deep interest-rate cut bets, bolstering the greenback’s recovery – a bearish outcome for gold.

Gold price technical analysis

Gold plunged on Tuesday, completely erasing last month's gains and inching ever closer to the 50-day simple moving average, a key support indicator located slightly above the $2,010 area. Bulls must defend this technical floor tooth and nail; failure to do so could trigger a move towards $1,990, followed by $1,975.

On the flip side, if buyers return and spark a bullish reversal, resistance emerges at $2,045-$2,050. Taking out this ceiling decisively could be difficult, but a breakout could create the right conditions for a rally toward $2,085, the late December peak. On further strength, XAU/USD could be on its way to retesting its record.

Gold price daily chart

Source: TradingView

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The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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