Gold Continues to Lose Appeal as Treasury Yields Rise

21 September 2022, 02:27

Market Focus

US stocks declined on Tuesday, coming under bearish pressure and suffering daily losses as traders are bracing for a hawkish Federal Reserve that’s expected to boost rates to levels not seen since before the 2008 financial crisis. The US Federal Reserve will announce its monetary policy decision during the US trading session on Wednesday, where it is expected to hike rates by at least 75 bps given stubbornly high inflation. The Fed could step up its policy rate by 100 bps, given the tight labor market and robust retail demand. As for now, the Fed’s foremost priority is to bring price stability into the economy and not let high inflation destroy the confidence of consumers in the economy. In the Eurozone, European Central Bank (ECB) President Christine Lagarde has cleared that the central bank is committed to bringing down the price pressures with whatever it takes, which might scale up its interest rates further.

The benchmarks, S&P 500 and Dow Jones Industrial Average both retreated lower on Tuesday as the slide in equities pushed the S&P 500 more than 10% below its Aug. 16 high. The S&P 500 was down 1.1% on a daily basis and the Dow Jones Industrial Average also dropped lower with a 1.0% loss for the day. All eleven sectors in the S&P 500 stayed in negative territory with the Real Estate and the Materials sectors the worst performing among all groups, losing 2.57% and 1.90%, respectively. The Nasdaq 100 meanwhile declined the least with a 0.9% loss on Tuesday, while the MSCI World index was down 0.9% for the day.

Daily Return vs US Dollar(%)

Main Pairs Movement

The US dollar advanced higher on Tuesday, witnessing upside strength and refreshing its daily top above the 110.2 level in the late US trading session amid the souring market mood. Higher US government bond yields have provided support to the safe-haven greenback, which soared to its highest in fifteen years ahead of the US Federal Reserve announcement on Wednesday.

GBP/USD suffered a 0.47% loss as market braces for the US Federal Reserve’s (Fed) monetary policy announcement. On the UK front, PM Lizz Truss unveiled a slew of policy measures that included a cut in the stamp duty. Meanwhile, EUR/USD remained under pressure and extended its intra-day slide towards the 0.9960 area amid the stronger US dollar across the board. The pair was down almost 0.50% for the day.

Gold was facing selling pressure after retreating lower to daily lows around the $1662 mark during the US trading session, as the expectations of a bigger-than-expected Fed rate hike has acted as a headwind for the safe-haven metal. Meanwhile, WTI Oil dropped further with a 1.08% loss for the day and touched a daily low near $83 area as the sentiment surrounding surging inflation and tighter monetary policy continues to weigh on oil prices.

Technical Analysis:

EURUSD (4-Hour Chart)

EURUSD (4-Hour Chart)

The Euro has seen some downward pressure as the U.S. Greenback continues to gain traction ahead of the key Fed interest rate decision. Volatility should be limited before the Wednesday American trading session for the foreign exchange market. The US 10-year Treasury yield has blown past the 3.5% threshold as market participants now fully anticipate at least a 75 basis point interest rate hike by the Fed. The German Producer Price Index rose to 45.8%, compared to 37.2% in August. EU inflation has continued to rise further despite the ECB’s move to leave negative interest rate territory. Economic slowdown and soaring energy prices will continue to plague the European economy and ECB’s ability to implement effective interest rate interventions.

On the technical side, EURUSD has successfully defended our previously estimated support level of 0.9969. Should the Fed surprise markets with a more than expected interest rate hike, EURUSD could spike down towards our estimated support level of 0.9902. RSI for the pair sits at 43.81, as of writing. On the four hour chart, EURUSD is currently trading below its 50, 100, and 200-day SMAs.

Resistance:  1.0011, 1.0055

Support: 0.9969, 0.9902

GBPUSD (4-Hour Chart)

GBPUSD (4-Hour Chart)

Cable has entered a consolidation phase around the 1.13 price region ahead of the Fed and BoE interest rate decisions. Short term interest rates on U.S. government treasuries have risen significantly as markets are now completely pricing in a 75 basis point interest rate hike by the Fed. Rhetoric around a super sized interest rate hike by the Fed has subsided as economic data from the previous releases have shown signs of economic slowdown in the U.S.. The BoE is expected to raise interest rates by a further 50 basis points, but agreement on the magnitude and frequency of interest rate hikes still remains a debate among members of the BoE.

On the technical side, GBPUSD has touched our previously estimated support level of 1.1463. In the case of a super sized interest rate hike by the Fed, Cable could break below to historical lows of 1.07225. RSI for the pair sits at 31.42, as of writing. On the four hour chart, GBPUSD is currently trading below its 50, 100, and 200 day SMAs.

Resistance: 1.1561, 1.1854

Support: 1.1463, 1.07225

XAUUSD (4-Hour Chart)

XAUUSD (4-Hour Chart)

Gold continues to trend lower against the Greenback ahead of the Fed interest rate decision. While the US 10-year Treasury yield soars past 3.5%, the non-yielding yellow metal continues to lose appeal to market participants. While, traditionally, Gold has been a tool to hedge against inflation, the pace of monetary tightening from global central banks have outpaced any hedging capabilities of the yellow metal.  A surprise 100 basis point interest rate hike by the Fed could send Gold further into correction territory. The $1600 per ounce price level will be key for Gold in the coming weeks as it marks the level just prior to the astronomic rise of Gold in 2020.

On the technical side, XAUUSD has consolidated around our previously estimated support level of $1660 per ounce. The second level of support is established around the $1600 per ounce level. RSI for the yellow metal sits at 37.33 as of writing. On the four hour chart, XAUUSD is currently trading below its 50, 100, and 200-day SMAs.

Resistance: 1740, 1800

Support: 1660, 1600