Gold Price Outlook: XAU/USD Range Trading Setup as US Yields Rise

[MongiIG]

XAU/USD ANALYSIS:

• US treasury yields rise across the board: 2,5,10 and 20 year securities
• Gold’s range trading conditions resume as real yields dampen gold’s long term potential
• XAU/USD Key technical levels analysed

 

Gold has remained rather quiet as inflation ticks up in the developed world but now we are seeing a number of nominal interest rate hikes expected for 2022 which should raise real interest rates from current low levels. Rising real interest rates tend to have a negative effect on gold as investors rotate towards interest-bearing investments.

Implied Rate Hikes 2022 (Selected Major Central Banks)

MAJOR CENTRAL BANK	IMPLIED NOMINAL INTEREST RATE HIKES*
Federal Reserve (Fed)	4
Bank of England (BoE)	4
European Central Bank (ECB)	1**
Bank of Canada (BoC)	6

*at the time of writing. ** Assuming the ECB hike in 10 bps increments

Source: Refinitiv via overnight interest swap rates

CBOE Gold Volatility Index

Source: CBOE Gold volatility index, Refinitiv

Today the German 10 year Bund trades above zero for the first time since May 2019 and US 2 year treasury trades above 1% for the first time since Feb 2020. There has been a significant rise in yields today across the board.

US Treasury Yields (2,5,10 and 20 year)

Source: Tradingview

Therefore if inflation is due to peak in the coming months and major central banks raise rates anywhere near current projections, then gold starts to look bearish over the medium to long term.

 

KEY TECHNICAL LEVELS FOR GOLD (XAU/USD)

The daily gold chart has proven to be a range traders dream over the last 18 months with rare moves outside of a rather well-defined range between 1754 and 1835. The precious commodity has also adhered rather well to overbought and oversold conditions as can be seen by the commodity channel index (CCI) – adding to the range trading allure.

The yellow metal looks to be coming off its recent high but remains above 1800, providing gold bears with a fairly attractive entry level with the nearest level of support (potential first target) of 1800, followed by 179; while swing traders may look to the 23.6% Fib of the 2020 high to 2021 low (1763).

Should gold hold above the psychological 1800 level, resistance comes in at the 38.2% Fib (1823) and 1835 thereafter.

Gold (XAU/USD) Daily Chart

Source: IG, prepared by Richard Snow

 

Written by Richard Snow for DailyFX.com. 19th Jan 2022.