Gold received a blow from the Fed

The quotations of gold futures fell to 2-week lows against the background of "hawkish" comments by Jerome Powell. Speaking before the Congress, the head of the Federal Reserve expressed confidence in the rapid achievement of inflation targeting, noted the strength of the world economy and a significant fiscal stimulus. In his view, the headwinds that took place in the past years, currently contribute to the dispersal of GDP. In particular, we are talking about the high demand for US exports, favorable financial conditions and the implementation of tax reform. Strong labor market allows you to count on increased investment.

Prior to the speech of Powell, investors believed that he would choose a cautious approach to monetary policy. After the accelerated growth of average wages and inflation, the futures market sharply slipped by a mark of three increases in the federal funds rate in 2018 and began to lay in the quotations of its instruments four acts of tightening monetary policy. Many expected that the chairman of the FRS will try to smooth this process and remind about the previous forecasts of the FOMC. This did not happen. On the contrary, Donald Trump's protege said that, in his personal opinion, compared with the December estimates, the outlook for GDP and inflation improved. The debt market reacted with the growth of bond yields, which triggered an avalanche of gold sales.

Dynamics of gold and yield of US bonds

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Source: Bloomberg.

Despite the growing risks of overclocking inflation, the rates of the US debt market are accelerating by leaps and bounds. As a result, the real yield also increases, which is a "bearish" factor for XAU / USD. And if in early 2018 investors preferred to ignore this factor, then the results of bond auctions returned their interest in the dollar. There is no panic about insufficient demand for US assets, and the inflow of capital will contribute to the correction of the USD index. Thus, the external background for precious metals begins to deteriorate, so do not be surprised that after an impressive start this year, its quotes are ready to plunge into the red zone.

Should the fans of gold throw a white flag? In my opinion, no. Most likely, the dollar's success will be temporary. Yes, interest in the Fed is back, but conditions change. If in 2015-2016 the Federal Reserve was the only issuing Central Bank G10, which planned to tighten monetary policy, in 2017 it had serious competitors. Among them is the ECB, to which hands are bound by inflation. Till. Overclocking the indicator in the second quarter will return the idea of normalizing monetary policy to the markets and will allow to restore the uptrend in EUR / USD. This will be a serious blow to the USD index and will return investors' demand for gold.

Technically, the breakthrough of the lower boundary of the short-term ascending trading channel increased the risks of implementing the target by 88.6% in the "Bat" pattern. A necessary condition for continuing the peak is a confident assault on the lower boundary of the long-term "bullish" trading channel.

Gold, daily chart

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