U. S. Treasury yields soar on Fed policy outlook, gold could fall further if dot plot remains hawkish

2023-03-22 16:48:17

Gold is likely to remain in a tight range as the market eagerly awaits the Federal Reserve's interest rate decision. Gold prices retreated sharply after hitting $2,000 on Monday, with rising U.S. Treasury yields also triggering its decline. Gold prices reversed to around $1940 after failing to expand the rebound in the Asian market to break through $1946. The precious metal is expected to continue consolidating as investors are likely to execute meaningful positions after the Fed rate decision is announced.

Gold surged to $2,000 an ounce as turmoil in the global banking sector prompted investors to flee to the safety of the U.S. Treasury market, sending yields lower. The precious metal rose as much as 10 percent to a one-year high around $180 on increased safe-haven demand following the collapse of Silicon Valley Bank and a crisis at lender Credit Suisse.

The banking crisis took a turn for the better with the intervention of the US authorities, injecting dollar liquidity into the market. The Fed initially reopened swap lines for central banks in need and opened a discount window for struggling commercial banks. Later, US Treasury Secretary Janet Yellen pledged deposit guarantees for all small banks. Earlier, gold's safe-haven appeal became more solid as investors moved money into bullion to protect themselves from pure volatility.

Those developments eased investor concerns somewhat, leading to a rise in risk appetite and U.S. stocks closing higher on Tuesday.

This further encouraged investors to consider the possibility of an additional 25 basis point rate hike by the Fed. According to the CME FedWatch Tool, there is an 85% chance that the central bank will raise rates by 25 basis points, which would push rates to 4.75-5.00%. With the Fed meeting looming, it will be crucial to keep an eye on the dot plots and forward guidance. A rise in the dot plot could reinforce investor expectations of a hawkish repricing, putting further pressure on gold prices.

Traders are advised to be extra cautious as this event could lead to various interpretations of the policy statement due to broad divergence among investors. Not all Fed events are created equal; some provide clearer price action while others lead to erratic trading. A press conference by Federal Reserve Chairman Jerome Powell is likely to provide investors with more clarity.

Gold Technical Analysis

Gold prices fell sharply after breaking below the head and shoulders pattern on the 1-hour chart, which indicates that the price of gold prices has ended the consolidation and turned bearish. Gold fell into demand territory in the $1,933.90-$1,938.40 range.

The RSI is oscillating within the bearish range of 20.00-40.00, indicating that downside momentum remains.

The 20EMA at $1950 continues to act as a hurdle for the bulls.

Gold must rise above $1950 to move towards the previous static level of $1960.

If the policy outlook is dovish, the volatility driven by the Fed decision could lead gold bulls to retest the $2,000 mark and above.

A break below the previous day's low of $1,935 could strengthen selling interest towards $1,900.

If Powell releases his hawkish stance, gold's bullish conviction will be tested at the March 17 low of $1,918, after which bears will attack the round-number level of $1,900.

Spot Gold 1 hour chart


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