Gold Price Analysis: XAU/USD consolidates within thin ranges as traders await key events this week

• Spot gold prices stuck within thin $1722-$1734 ranges on Monday, with traders tentative ahead of key events.
• The main events for gold traders to watch will be US retail sales and the FOMC rate decision.

It’s been a very subdued session for spot gold (XAU/USD); the precious metal has admittedly moved a little higher and looks set to close Monday trade with gains of about 0.2% but has remained rangebound between a very narrow $1722-$1734ish trading range. Whilst US government bond yields dropped a touch and inflation expectations rallied (precious metal bullish), the US dollar was firmer (precious metal bearish), which blocked gold from rallying back towards last week’s highs in the $1740s.

Subdued trading conditions were also seen in other asset classes (especially in FX markets), which is unsurprising as market participants keep their powder dry ahead of key events later in the week. Most important for precious metals markets will be US Retail Sales data for the month of February, set for release on Tuesday at 12:30GMT; markets will hope for further evidence that the US consumer is in good health as an indication that the US economic recovery remains on track. Meanwhile, Wednesday sees the FOMC release the result of their latest monetary policy decision.

The reaction in precious metals markets is likely to, as ever, be a function of what happens to the US dollar and US government bond yields. With the Fed having not expressed much concern about the recent rise in yields (traders will remember yields spiking in wake of Fed Chair Jerome Powell’s last comments), risks seem tilted to the upside for bond yields; a surge higher could see the US dollar strengthen and the likes of gold (and silver) to come under pressure.

FOMC Preview

The FOMC is expected to hold interest rates at their zero-lower band (0.0-0.25%) and the rate of asset purchases steady at $120B per month (of which $80B are US government bonds). Meanwhile, the statement and Fed Chair Jerome Powell’s remarks in the press conference are likely to stick to the usual dovish tone; i.e. no rate hikes until the bank has met its updated dual mandate (i.e. full employment and inflation that is moderately and sustainably above 2.0%), something which the Fed is likely to reiterate is still a long way off, and no tapering of asset purchases until substantial further progress has been made towards its dual mandate (something which Powell is also likely to say is a long way off).

The Fed will be releasing new economic projections which will be more closely scrutinised than usual; officials have been talking about how they expect inflation to pick up in the short-run and the updated inflation forecasts will formalise such expectations. The updated dot-plot is also of note; markets have brought forward their expectations of the first Fed hike as soon as late-2022/early-2023, despite the Fed’s old dot plot not forecasting any hikes through to 2024. Maybe the new dot plot might foresee a hike in 2023 (if not, that would be dovish).

Meanwhile, traders will also be on the lookout for any more information of if, when, and how the Fed might respond to further increases in US government bond yields, as well as any hints as to the conditions the Fed might want to see before tapering asset purchases – more information on the former is more likely than on the latter, as the Fed will likely want to avoid causing yields to move higher.

A few technical factors are also worth considering; bank SLF relief (which means they do not have to hold capital reserves for their treasury holdings) is set to expire this month and the Fed needs to decide whether to extend this. If not, this could cause some market problems as banks rush to meet their new, higher capital requirements. Some desks also think the bank might tweak the Interest of Excess Reserves Rate (IOER), which is a tool the bank uses to keep the Federal Funds rate within its target band – if they do, they will insist that this does not constitute a tweak to monetary policy, rather just a technical adjustment to maintain policy.