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Special report: gold price peels lower as US dollar and Treasury yields gain

Gold slipped after Fed speakers delivered an integrated message; the US dollar and Treasury yields were lifted on the policy clarification and if the Fed continue to talk tough on inflation, is XAU/USD capped for now?

The gold price went lower after Federal Reserve presidents from four districts got the bull horn out and highlighted the need to rein in inflation. The messaging lifted Treasury yields, real yields and the US dollar, undermining XAU/USD.

The Fed hawks were Cleveland’s Loretta Mester, Chicago’s Charles Evans, San Francisco’s Mary Daly and renowned rate hike cheerleader, St. Louis’ James Bullard.

The united front appeared necessary to correct market assertions that the Fed had pivoted after last weeks Federal Open Market Committee (FOMC) meeting.

President Daly said that the Fed was nowhere near done that they “are resolute and completely united on achieving price stability.”

President Evans said that they were a couple of inflation reports away from confirmation that they are on the right track for monetary policy.

President Mester cited the tight labour market and she said that she would like to see very compelling evidence that price increases are moderating.

President Bullard highlighted the difference in this hiking cycle to the Volker episode from 40-years ago. He said that central banks now have a well understood approach to taming inflation and have more credibility in being able to achieve this with a soft landing.

Equity markets had rallied on that perception of a pivot. This aided corporate credit spreads to narrow, which is essentially an easing of monetary conditions. The exact opposite of what the Fed is trying to achieve.

The FOMC normally meet every 6-weeks or so. The next meeting isn’t until late September, which will be an 8-week gap since the July gathering, the largest in the calendar. Unable to take any action until then, jawboning is the next best thing.

Going forward, should markets get ahead of themselves and price in too much easing of policy, it is reasonable to expect similar types of commentary from Fed Presidents re-iterating that the tightening cycle is not over.

Depending on circumstances leading up to such verbal massaging, it may see USD supported on any dips, which could impact gold prices.

Gold against US ten-year real yield, US ten-year nominal yield, USD (DXY) index

This information has been prepared by DailyFX, the partner site of IG offering leading forex news and analysis. In addition to the disclaimer below, the material 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 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. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research 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.

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material 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 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. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research 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.

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