Gold Price Analysis: XAU/USD drops under $1850 following hawkish Fed commentary

• Spot gold has slipped in recent trade amid a risk in short-end yields prompted by hawkish Fed speak.
• XAU/USD broke out to fresh two-week lows under $1850.

Spot gold (XAU/USD) prices have come under pressure in recent trade having broken below key support and amid a rise in short-end US yields. Prices, which shot up last week amid demand for inflation protection in wake of a much hotter than expected US inflation report, had been consolidating within a pennant structure. However, on Friday, spot gold broke to the south of this pennant, triggering a bout of technical selling that even pushed XAU/USD prices below last week’s lows at $1850. Having carved out fresh weekly lows around $1844, prices are now consolidating just to the south of the $1850 mark. Gold bears may now target a move down to the next key area of resistance around $1833. 

Hawkish Fed

The technical break to the downside coincided with a sharp uptick in short-end US yields (as well as a pickup from lows across the US yield curve), which was itself triggered by hawkish Fed commentary. 2-year yields were down as much as 5bps at 0.45% on Friday, but are now back to flat around 0.50%. Short-end real yields are also higher on Wednesday, with the 5-year TIPS yield up 6bps to -1.85%. Higher yields increase the opportunity cost of holding non-yielding precious metals, thus weighing on the demand for gold.

In terms of the latest from the Fed; Governor Christopher Waller called for an accelerated QE taper and said that rate increases could be appropriate as soon as Q2 2022. Shortly thereafter, influential Vice Chairman of the FOMC Richard Clarida said that it could be appropriate to discuss an accelerated QE taper in December. Plenty more FOMC members will hit the wires next week market participants will be eager to assess the appetite on the Committee for an accelerated QE taper and earlier rate hikes.