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October 1, 2021

XAU/USD Deep Dive: Taper Tantrum Likely?

Bart Kurek

Check out my previous Gold deep dive from late July here to see how we have progressed...

Looking at Gold's long-term view, it's pretty clear to say that price isn't trying to go back inside the descending channel from the bullish flag, but instead looking to reject off the channel's top, use this level as support and push higher to create new highs in the market. Over the past couple of months, we can see price non-stop staying above the channel's top and looking to create a bullish move to the upside, just like we saw back in July 2020.

The breaker block at 1735-1750 is now deemed invalid as price seems to have reversed around it and is now above it. We can see that price has once again bounced off the channel's top to the key horizontal level at 1765, where we have seen price constantly change between support and resistance. If bullish momentum continues and we see price head towards the shorter-term levels such as 1795 and 1835, price will likely consolidate between these zones as we saw over the past two months.

However, with recent USD strength, it's also a likely possibility we will see price continue this short-term descending channel and reverse off the channel's top back down to make new lows in the channel. Look out for price action confirmations over the next couple of days to see how price reacts to meeting the channel's top, whether we see price break or respect this zone.

We have a pretty mixed retail sentiment on Gold, 52% of traders are primarily long however, it's not enough to show a clear winner out of the bears. I would say it's too early to get into longer-term positions; however, look out for how price reacts to its current touch of the channel's top, and we'll likely see more bears stepping in.

Over the next two weeks, we've got a couple of important news events coming out, which would be a significant catalyst in the price of Gold. This includes NFP, FOMC Meeting and the Treasury Currency Report. We're still yet to see any forecasts for NFP but traders will be in high anticipation of this event as it's expected to cement the case for the Fed to announce its tapering at the November meeting.

Our Outlook

USD Q2 GDP was upwardly revised at 6.7%, better than anticipated. However, employment-related data keeps disappointing ahead of NFP next week. Fed Chair Powell said that one good employment report could convince him they have reached the employment threshold needed to reduce financial support and begin tapering. This is important because the US economy is meeting its economic goals of maximum employment, stable prices and moderate long-term interest rates.

The US tapering and tightening monetary policy is important because it means it's likely we'll see Gold drop heavily following the USD's strength. Each time the Fed tightens policy, there are fears about the replay of "taper tantrum" which were substantially hit by the higher yields, stronger greenback or capital outflows.

I'm not saying Gold will drop heavily, as likely as it is, it's also very much likely it could do the complete opposite. The vital thing to take from this article is to watch out for next week's NFP report and listen closely to what is said in any FOMC meeting, as any hint or confirmation of tapering could be detrimental to XAU/USD's value.

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