• Gold has pulled back from earlier highs and is back in the low $1920s as the US dollar/US yields rally.
• Fed Vice Chair Brainard was hawkish on balance sheet reduction, sparking the reversal lower.
• Focus now turns to Wednesday’s Fed minutes release as gold bears eye a test of recent sub-$1900 lows.

Spot gold (XAU/USD) prices have pulled back sharply from an earlier rally towards their 21-Day Moving Average in the $1940s and recently hit session lows beneath the $1920 mark. Technical selling ahead of last Thursday’s highs in the $1950 area and the 21DMA probably played a part but the pullback looks to have mostly been a result of hawkish commentary from Fed Vice Chairwoman Lael Brainard. She said that rapid balance sheet reduction was likely to begin as soon as May and her comments triggered a spike in US yields across the curve.

US 10-year yields hit their highest levels since April 2019 and now trade more than 15 bps higher on the day in the 2.56% area. US 2-year yields also hit their highest since April 2019 and were last up more than 9 bps on the session to the north of the 2.50% level. Higher US yields increase the “opportunity cost” of holding non-yielding assets such as gold and also helped to push the US Dollar Index towards its highs for the year near 99.50. A stronger US dollar makes USD-denominated gold more expensive for the holders of international currency.

Further Fed speak is expected in the coming hours (NY Fed President John Williams is up at 1900BST), keeping upside risks to US yields and the buck alive. That might mean that spot gold prices continue to languish in the low $1920s, as prices continue to probe the lows of the last five sessions. The main calendar event of the week is the release of the minutes of the Fed’s last (and very hawkish) meeting on Wednesday.

At this point, given all the hawkish rhetoric that has come from various Fed policymakers in recent days, the bar for a hawkish surprise from the minutes is high. But the direction of Fed policy remains clear, with the big question now how high the terminal rate will be. A slip back towards $1900 for XAU/USD certainly seems to be on the cards this week. But geopolitics and ongoing angst about the inflationary impact of the Russo-Ukraine conflict might be enough to keep gold supported above its 50DMA (currently at $1901.40), as was the case last week.