Here’s how Gold and the US Dollar may react to Fed’s tapering move

federal reserve tapering will affect gold and us dollar
“Here’s how Gold and the US Dollar will react to Fed’s tapering move” Image by Charley via Flickr
  • US Federal Reserve will begin tapering move by reducing $15 billion worth of asset purchases per month.
  • The degree of tapering will influence the US Dollar’s rally.
  • Gold spot rates could bump up if the Federal Reserve pushes back on interest rate hikes.

PUNE (Coinchapter.com) — The US Federal Reserve is about to begin its reduction of $120 billion worth of monthly asset purchases. The US dollar rose in strength owing to the market adjustment in anticipation of the upcoming FOMC meeting. However, demand for the greenback has been lackluster as investors have mentally prepared themselves for the taper.

Meanwhile, Gold spot rates dipped ahead of the critical Fed meeting. As a result, the XAU/USD pair extended its decline revisiting $1,778 as US stocks continued to post record highs.

Related: Another reason why Bitcoin reached $67K: A Gold Exodus

What Lays Ahead For Gold?

Traders continued holding on to their cash stashes in anticipation of Fed chair Jerome Powell’s comments on inflation on Wednesday. As a result, the yellow metal broke below the Ascending Channel formation, dictating its trend since September 2021.

Gold investors will be closely watching the Fed’s comments on hiking benchmark interest rates. Also, their trading decisions will be impacted by inflation and the trend in short-term Treasury yields markets. As a result, the XAU/USD pair stands to undergo deeper downside correction if the Fed adopts a hawkish tone in the upcoming FOMC meeting.

But things will look different if the Fed chair decides to lay to rest the expectations of an earlier rate hike. Recurrent selloffs led to Gold’s relative strength index (RSI) dropping to the neutral zone. As a result, bulls would be tempted to jump back in again, and in turn, would push XAU/USD prices higher.

Related: Gold poised for a new leg up while Bitcoin holds above $60K

“Gold closed slow and bearish today but there is no major change in its price action. I’ll be waiting for a successful breakout from this range. I’ll be following the intraday volatility for a scalp setup tomorrow during the FOMC event

noted CRYPTOWZRD
Gold prices look to attempt a rally to $1,834
Gold prices look to attempt a rally to $1,834. Source: XAUUSD on TradingView.com

“Gold (XAUUSD, $1,791) ahead of FOMC release on November 3 continues to trade under psychological $1,800 level. Expect gold to push through the immediate resistance at $1,832 – 1,835 (dashed) on the next attempt and advance towards immediate target $1,850 over the coming weeks!”

said investment manager and independent financial markets researcher Rashad Hajiyev

US Dollar Outlook

The degree of tapering will influence the direction of the US dollar. In detail, if the depletion rate of the monthly asset (treasury bonds and mortgage-backed securities) purchases is less than the decided figure of $15 billion a month, then tapering would be conservative. On the other hand, a number more than the said figure would be aggressive.

“Any number larger than $15 billion (between Treasuries and mortgage backed securities) would be considered aggressive and anything smaller would be considered conservative. The larger the reduction, the more upside pressure for the dollar and downside pressure for stocks.”

observed Kathy Lien of BK Asset Management

But Ms. Lien also pointed out that expectations of the Fed being hawkish are low. Nonetheless, investors will derive their opinions about Mr. Powell’s supposed comments on tapering and interest rate hikes, which led her to conclude that market participants and Fed are not behaving in tandem with each other.

“Right now, there’s a significant misalignment between investor expectations and Fed guidance. None of the members of the FOMC expect rates to rise in 2022 but the market is pricing in over 50bp of tightening next year.”

Ms. Lien also added that if the Federal Reserve sticks to the “inflation is transitory” view; the US dollar will rise in strength. But if the opposite scenario plays out, then the greenback will be in for a dip.

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