When the Fed surprised the markets with insane monetary stimulus in 2020, gold hit an all-time high. However, the time has come to taper the QE. How will the gold price react to this? Let us discuss the Forex outlook and make up a gold trading plan.
Fundamental gold forecast for a week
History repeats itself. When the Fed began to withdraw monetary stimulus in 2013, the gold price collapsed. At that time, it took ten months to taper QE. Currently, unemployment is at 5.2%, significantly lower than eight years ago, and inflation is much hotter. The FOMC hawks are keen to end the $120 billion QE program by mid-2022. If all goes according to their plan, the XAUUSD bulls will have a hard time.
According to the President of the Federal Reserve Bank of New York, John Williams, there is no need to follow a certain time frame or the approach that was previously. Macroeconomic indicators are better than in the past. According to 40% of the Financial Times experts, the Fed will announce the QE tapering in November, 31% expect this in December. Experts raised their forecasts for PCE from 3% to 3.7% by the end of 2021. Most of them expect that inflation will continue to exceed the target of 2% at the end of 2022.
The long-term nature of inflation is the key to the future fate of gold. If the PCE index continues to be at higher levels for longer than the Fed expects, it will be forced to raise rates aggressively. Otherwise, inflation risks reaching all-time high levels. In this situation, the US dollar will strengthen, and the precious metal will weaken.
Along with the return of investor interest in the US dollar, the XAUUSD bulls should worry about the growth of Treasury yields. According to research by the Washington Bipartisan Policy Center, the government is likely to run out of cash and may begin to pass payments on its obligations sometime between mid-October and mid-November. As a result, the risks of default will increase. Such an event has never happened before, and it could have disastrous consequences for financial markets. Let’s hope Congress won’t let this happen. The ceiling of the national debt will be suspended, the issue of bonds will rise sharply, which will lead to higher yields. Earnings were flat as over the past 90 days, the volume of Treasury issuance was lower than the Fed’s QE purchases.
Dynamics of the ratio of Treasury issuance and their purchases by the Fed
Source: Nordea Markets.
Gold buyers should also be afraid of the seasonal nature of COVID-19. Last summer, the epidemiological situation in the United States deteriorated significantly, while in Europe everything was more or less normal. However, in the middle of autumn, the gap began to close. If history repeats itself in 2021, the slowdown in economic growth in the eurozone will deprive the euro of its main advantage and significantly lower EURUSD price.
Dynamics of COVID-19 cases in Europe and the US
Source: Nordea Markets.
Weekly gold trading plan
A strengthening dollar and rising US Treasury yields will create an extremely unfavorable environment for XAUUSD. The downtrend will likely continue, so I recommend holding and adding up to short trades formed on the breakout of the $1806 per ounce level in case of a breakout of support at $1782 or on corrections.
Price chart of XAUUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the…