Counting Hawks in FOMC Minutes Weighing On Gold

Gold prices have come under pressure amid renewed geopolitical tensions this week, as investors raise bets that the new Fed will be more hawkish as the US economy recovers.

The Key Points Moving the Market

• Rising concerns over inflation are pushing global yields higher, denting risk appetite and weighing on gold and stock markets.
• Markets are looking for clues among the FOMC minutes for hawkish clues after the recovery in US jobs data.
• Odds of a rate hike this year rising despite the new Fed chair's dovish reputation as bond vigilantes push the central bank to address rising inflation.

Odds of a Fed Hike Keep Rising

The market selloff last week came amid a notable rise in global bond yields as investors priced in the risk of higher inflation amid an unresolved situation in the Middle East. Notably, 30-year yields in Japan, Germany and the UK have risen to levels not seen since the late 90s and ahead of the dot-com bubble (amid the "AI bubble"). Long-term yields are more sensitive to political risks. The US 30-year Treasury yield is also higher, but only to levels not seen in around a year. However, this trend is relevant for gold, as it is priced in dollars and reacts to shifts in US interest rates. Investors are increasingly concerned that inflation pressures will persist for a long time, but some central banks will find it harder to deal with them amid slow growth. This has allowed the greenback to gain in recent days ahead of the release on Wednesday of the minutes from the last FOMC meeting presided over by Jerome Powell.

The new Fed chair, Kevin Warsh, will officially be sworn in on Friday, and investors will be looking at the upcoming minutes for insight into what he will face at his first meeting in June. Markets are already raising bets that the Fed will raise rates, with the odds now slightly over 50% that it will hike before the end of the year. The last Fed meeting was notoriously contentious, with three members dissenting against language that suggested the Fed's next move would be a cut. Warsh, being appointed by US President Donald Trump, is assumed to have a more dovish disposition than his predecessor. However, he could face increasing dissent, as high inflation, a recovering jobs market and healthy US economic growth indicate that the Fed will have to turn more hawkish. Traders will be eager to see who is likely to join the push for higher rates.

A Hawkish Fed Could Dent Rising Yields

Another factor could push the new Fed chair towards hawkishness. US Treasury Secretary Scott Bessent has repeatedly clarified that Trump is attacking the Fed because he wants lower yields on US debt. If the Fed is more hawkish, investors will be more confident that inflation won't get out of hand, which could lower yields, particularly on the benchmark 10-year Treasury. Analysts suggest the market selloff last week was driven by higher yields as "bond vigilantes" seek to convince the Fed to raise rates. Gold prices are under pressure despite being a hedge against inflation, as traders expect the Fed to respond to the data rather than potential pressure from the White House. Warsh's swearing-in ceremony is an opportunity for him to address monetary policy issues, and that could also affect markets, including gold.

Gold Bottomed Out or Initial Rejection?

The price of gold has fallen to a 7-week low and retested the lower VWAP line at $4450, but while remaining above $4380 and even $4250, the chances it prints a pennant pattern are sensible. If bulls can maintain support at $$4500, reclaiming the middle line of $4680 would expose the upper VWAP at $4780. A break of the peak at $4885 could leave behind the pennant low and accelerate towards new record highs. However, failing to hold the short-term support or reverting after a short-to-medium-term rally could still see the yellow metal roll towards $4K.

Source: SpreadEx | Gold, Daily Chart