Gold Price Forecast XAU/USD – Higher as Bank of Japan Policy Tweak Pressures U.S. Dollar

Gold futures are edging higher on Tuesday amid a drop in the U.S. Dollar. The greenback is weakening against its peers in a move led by a sharply higher Japanese Yen. Perhaps limiting the bullion’s gains, however, is the hawkish outlook by the U.S. Federal Reserve.

At 12:25 GMT, February Comex gold futures are trading $1815.00, up $17.30 or +0.96%. On Monday, the SPDR Gold Shares ETF (GLD) settled at $166.32, down $0.47 or -0.28%.

BOJ Shocks Global Markets with Bond Yield Shift

The Bank of Japan caught markets off guard by tweaking its yield control to allow the yield on its 10-year Japanese Government bond (JGP) to move 0.5% either side of its 0% target, up from 0.25% previously, in a move aimed at cushioning the effects of protracted monetary stimulus measures.

The move prompted the Japanese Yen and bond yields around the world to rise suddenly. Although U.S. Treasury yields rose on the news, the move also drove the Japanese Yen sharply higher against the U.S. Dollar which carried over to most of the major currencies.

A weaker greenback tends to drive up foreign demand for dollar-denominated gold prices. However, higher yields tend to weigh on bullion prices because gold is a non-yielding asset.

Thin-Holiday Volume, Hawkish Fed Policy May Limit Gains

Gold is higher, but some believe the move is slightly exaggerated because thin-holiday trading is sucking up liquidity. Meanwhile, there are still worries that a higher terminal Fed rate could prevent gold from enjoying an extended rally.

Furthermore, we may be looking at a short-term reaction to the Bank of Japan move, with longer-term gold traders monitoring Fed Chair Jerome Powell’s promise that the central bank will deliver more rate hikes next year to curb inflation. Meanwhile, other major central banks have also highlighted a similar hawkish stance.

Short-Term Outlook

With the majority of the major central banks already raising rates and signaling more to follow, gold was already struggling to extend its current rally. Now that the BOJ has taken a step closer to changing its ultra-dovish policy, a sustainable gold market rally may be a little more difficult.

In our opinion, gold is not likely to truly take off to the upside until the Fed indicates a pause in its interest rate campaign.