Gold Price Analysis: XAU/USD reverses sharply lower from above $1800 to low-$1770s on hawkish Powell remarks

• Spot gold prices fell sharply from close to $1810 to the low-$1770s amid hawkish comments from Fed Chair Powell.
• Powell said that a faster QE taper might be appropriate and will be discussed at the December FOMC meeting.

Spot gold (XAU/USD) prices have turned sharply lower in recent trade following hawkish remarks from Fed chair Jerome Powell that sent the US dollar and short-end and real US yields lurching higher. The precious metal pulled back abruptly from earlier session highs close to $1810 and now trades in the low-$1770s, a near 2.0% turnaround from earlier session highs. Spot gold is now trading down by mover than 0.5% on the day, though has not yet broken below weekly lows printed on Monday at almost bang on $1770.

Should this level break, that would open the door to a swift drop to the next significant area of resistance close to $1760, though such a move would likely require further USD and US bond yield upside. This is far from guaranteed as markets continue to fret about the Omicron variant; the market reaction to Omicron fears so far has been to send yields and the dollar lower. Therefore, fresh Omicron-related risk-off, if it kneecaps any further hawkish Fed moves like the one seen on Tuesday, may offer some much-needed support to gold.

For reference, Powell’s remarks sent the US 2-year yield nearly 10bps higher from prior session lows under 0.45% to trade close to 0.55% for a gain of about 5bps on the day. Meanwhile, the 10-year only recovered around 4bps off prior session lows to still trade down about 5bps on the day around 1.45% versus a 1bps gain in the 10-year TIPS yield, implying a roughly 6bps decline in 10-year breakeven inflation expectations (to now under 2.50%).

Shorter-duration real yields saw a bigger bounce, with the 5-year TIPS yield now up about 8bps on the day to above -1.70%, while 5-year breakeven inflation expectations dropped about 7bps to close to 2.90%. Recall that this was above 3.30% as recently as 16 November. The moves higher in short-end and real yields helped propel the dollar higher, with the DXY now flat on the day in the 96.30s, having been as low as the 95.50s prior to Powell’s comments.

Hawkish Powell

To quickly recap the main points from Powell’s remarks; in the Q&A section of the testimony, he said that it may be appropriate to accelerate the pace of the bank’s QE taper and the FOMC will discuss this at its 15 December meeting. Moreover, he said it is time to drop the characterisation of inflationary pressures as transitory.

This added to the somewhat hawkish tone to his economic commentary in his statement to Congress, which had been pre-released to the public on Monday. In the pre-released remarks, Powell highlighted the strength of the economy, noted higher inflation (and did not use the phrasing “transitory”) and the tight labour market. Moreover, he noted how, if anything, the Omicron variant may hold back labour supply, which could exaccerbate inflationary pressures.