Gold, XAU/USD, Federal Reserve, Powell, Brainard, FOMC – Talking Points
- Gold prices are moving lower as traders buy the US Dollar and ditch Treasuries
- Federal Reserve bets remain in favor of 75-bps hike after US services PMI data
- XAU traders eye Fedspeak from Brainard and Powell as blackout period nears
Gold prices are moving lower through Asia-Pacific trading, extending overnight declines as the US Dollar and Treasury yields climb. The markets are adjusting to price in a Federal Reserve that appears ready to continue its policy tightening through rate hikes and quantitative easing, even if it comes at the expense of economic growth.
The yellow metal is trading below 1,700 and is approaching its monthly low at 1,688.91, set on September 01. An upbeat US services sector PMI from ISM released on Tuesday sent Treasury yields surging on the view that it would underpin the Fed’s commitment to hiking rates at an aggressive pace. Indeed, overnight index swaps and Fed funds futures show that a 75-basis point rate hike is the favoured outcome at the September 22 FOMC announcement.
The 30-year Treasury yield hit its highest level Since July 2014, hitting 3.515% earlier today. Gold prices typically fall when US government bond yields rise, as it is a non-interest-bearing asset. Moreover, shorter-term yields rose as well. That benefited the Greenback, which made gold more expensive to foreign buyers. Meanwhile, breakeven rates—a market-based forward inflation gauge—are on the move lower. The 2-year breakeven is trading near its yearly low after months of declines amid central bank tightening. Gold prices are seen as an inflation hedge to many, which explains the correlation in the chart below.
The behavior in Treasury and foreign-exchange markets may cool over the short term, but the chances for a reversal are unlikely. China and its Covid-related woes pose a big headwind to global market sentiment. The FOMC is unlikely to back off until it sees substantial progress on easing prices, and a US inflation update won’t come until September 13.
However, two FOMC voters are due to speak tonight, which may provide markets with a better picture of where the committee’s collective thinking lies. Federal Reserve President Loretta Mester is set to deliver remarks at a Market News International webcast, and Vice Chair Lael Brainard is scheduled to speak at the House/Bank Policy Institute Annual Conference. Later this week, Fed Chair Jerome Powell will partake in a discussion during the Cato Institute’s 40th annual conference. That will be it for Fed speak, as the FOMC blackout period begins on Saturday.
— Written by Thomas Westwater, Analyst for DailyFX.com
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