Gold Prices Charge Toward Fibonacci Support as Markets Bet on Higher Fed Peak Rates

After a solid rally in January, gold prices (XAU/USD) have entered a downward spiral this month, falling nearly 7% from their short-term high set two weeks ago near $1,975 per troy ounce. This bearish retrenchment has been driven primarily by the breakneck surge in U.S. Treasury rates, with the 10-year note rising some 35 basis points to 3.87% over the past ten trading sessions, a significant move in the fixed income space.

The recent bond market dynamics, which have reinforced the U.S. dollar‘s recovery, have been triggered by a hawkish repricing of the Fed’s policy outlook, as hopes of disinflation began to clash with reality, especially after the latest US CPI report. For context, January inflation clocked in at 6.4% y-o-y, two-tenths of a percent above expectations, a sign that the process to restore price stability will be long and bumpy.

2023 FED FUTURES, TREASURY YIELDS, DXY INDEX & GOLD PRICES CHART

Expectations that the Federal Reserve‘s peak rate will settle higher than initially predicted are likely to keep Treasury yields biased to the upside, paving the way for the greenback’s rebound to march forward. Broadly speaking, when interest rates rise and the U.S. dollar commands leadership, precious metals tend to lose appeal as investors look elsewhere for better returns. This situation could keep gold prices skewed to the downside in the short term.

In terms of technical analysis, gold prices are currently sitting slightly above key support at $1,838, created by the 38.2% Fibonacci retracement of the November 2022/February 2023 advance. If the bulls fail to defend this floor and prices drop below it decisively, selling pressure could accelerate, setting the stage for a pullback towards the 200-day simple moving average just a touch above $1,785.

In contrast, if buyers return and spark a bullish reversal from current levels, the 50-day simple moving average could act as a soft resistance, followed by 1,880. Above this barrier, the next area of interest lies around the psychological mark of $1,900.