Explained: Why gold is rising with 10-year yields and what to expect ahead of the Fed

– Gold Price has been boosted by years of a recession and a drop in long-term yields.

– Returns on 2-year US notes may play a growing role in XAUUSD dynamics. 

– The precious metal may trade in a $1,860 to $1,880 range ahead of the Fed.

Gold Price short-term bullish – XAUUSD has surged to higher ground in response to US inflation figures and has been consolidating its gains since then, holding above $1,860. That is the same $1,860 that has capped previous attempts to rise. 

Why has gold advanced while US yields have risen? The explanation lies with bond market dynamics so bear with me a moment whilst I explain. Bond markets suffered a major sell-off after the US reported an increase of 0.6% in Core CPI MoM, the figure most relevant to markets and the Federal Reserve. The data point most significant to consumers – headline inflation year over year, hit a new 40-year high of 8.6%.

Both 10-year yields – relevant to gold – and those on two-year notes, which are best for gauging how markets expect the Fed to act, advanced. However, those on two yields rose at a much faster pace. If they surpass the 10-year yield – yield curve inversion – it has historically tended to reflect fears of a brewing recession. The Fed is keen to crush inflation and the goal may justify all means – even if that means pushing the US into a recession. 

If the US economy shrinks, the Fed would eventually have to cut interest rates and therefore, long-term yields such as 10-year ones would have to fall. That is what pushed gold higher.

Gold technicals 

Technically, XAUUSD stalled at $1,880, which is a veteran line of both support and resistance. However, after pulling back it held above $1,860, another separator of ranges. The 4h-RSI and the MACD look upbeat, opening the door to fresh upside moves. However, I would expect any such moves to be limited ahead of the all-important Fed decision coming on Wednesday. Tensions cause narrower ranges before big events – and the Fed’s decision is the most important event out there. Afterward, volatility could explode. 

The precious metal’s price has room to rise toward the early June high of $1,874, and then $1,880, but I wouldn’t expect it to go further. On the downside, support below $1,860 is at $1,853, which is where the 50, 100 and 200 4h-SMAs converge. 

Gold and the Fed

I believe ranges will be narrow, allowing traders to play the range. And then, it will be up to the Fed and the outcome for yields. An increase in 10-year yields would be gold-negative and a drop would be positive. 

If Fed Chair Jerome Powell shocks markets with a 75 bps hike on Wednesday, it could boost short-term yields and lower long term ones, supporting gold. If the Fed settles for what it communicated – 50 bps and no commitment about September – short-term yields would fall while long-term ones rise, weighing on the precious metal. 

This post is a response from FXS analyst Yohay Elam to a question from a user. Take advantage of your Premium membership and use the Ask Our Analysts button to access our experts.

Source: Yohay Elam – FXStreet

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