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19 Aug 2020

Gold Price Analysis: XAU/USD sinks on firmer US dollar tones and the FOMC

  • Gold, correlated to the US stock market, is under pressure following the FOMC minutes.
  • US stocks have moved to the edge of a cliff as the FOMC looks like a rabbit in the headlights.

The Federal Open Market Committee Minutes, which have highlighted that a 'highly accommodative stance of monetary policy likely needed for some time', portrays a lack of conviction which has upset financial markets.

The greenback, which has been positioned in the highest levels of shorts since 2017, has caught a bid on the event, weighing heavily on the price of gold. 

Ahead of the Minutes, DXY was trading at 92.69 and in the aftermath, it broke into the 93 level to score a fresh recovery high of 93.03. 

Gold, on the other hand, was at $1,966 and has since fallen to a low of $1,934,84, down over 3.17% on the day. 

FOMC sends stocks to the edge of the cliff

Within the text of the Minutes, markets picked up on a reluctance to control the yield curve. This has given the US treasury yields a boost and in turn, has helped to sink gold.

Gold and the US stock market had been positively correlated since November of last year until 6th August's drop in the gold price.

However, one of the most pronounced parings can be seen when the stock market crashed in March. Gold also tumbled as stock market margin calls lead to the liquidation of longs in the yellow metal.

The FOMC, if seen to be putting a cautionary pause on the prospects of yield curve control, could well have spelt out a meaningful correction for both e stock markets and gold, throwing a lifeline to the US dollar. 

Meanwhile, analysts at TD Securities note, that ''with +93% of momentum signals long on average over the past 60 days, the upside momentum in gold is extreme.''

The risk of a deeper pullback was previously elevated, but macro headwinds are once again turning to tailwinds, which could keep the extreme momentum in place for some time longer. It's hard to call the top in momentum.

Gold levels

 

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