A possible taper tantrum is back on the table after the Federal Reserve’s decision to accelerate cuts in its asset-purchase program. Earlier this year when the Fed first
announced its taper plans, the market reaction was muted. But perhaps a market flare-up similar to the 2013 taper reaction — when Treasury yields, duration spreads and the dollar soared and emerging markets melted — has only been delayed not averted.
And now taper tantrum risks are growing, not waning. Even doves at the Fed want to tackle inflation aggressively. In prepared remarks before the Senate Banking Committee, Fed Chair Jerome Powell repeated his worry that inflation is hurting consumers.
The risk for 2022 then is that tapering and rate hikes become fully re-coupled as the Fed accelerates tapering and moves forward the potential for rate hikes. The curve flattening we have witnessed so far makes sense, especially with the uncertainty of the omicron variant. But, while growth should remain robust, buoying equities, earlier rate hikes will dampen the bid for higher risk assets because investors won’t have to reach for yield to meet return targets as much.
The larger question is whether financial markets have successfully digested omicron uncertainty and an accelerated monetary policy cycle and come out the other side. The chances of that seem remote; it takes more than a couple of sessions to adjust to a new reality. Indeed, a number of assets remain cringingly overpriced, and it’s going to require a much bigger re-calibration if the Fed really is serious about inflation.
Gold is currently testing an important area of support that dates back to May 2020. The area around 1765 has been highly influential many times as support, with the most recent occurrence coming early last month before gold rallied nearly $120.
Thus far, the current test is an uninspiring one as the general tone and trend remain negative in the near-term. If gold can’t get into gear soon, then look for a break towards lower levels. The key is seen as how the developing descending wedge unfolds.
A downward thrust into the $1750s could lead gold to a trend-line running up from March 2020, currently residing in the mid-$1730s. A break below the trend-line would have the September low at $1722 in focus. On the flip-side, a top-side breakout will quickly have the 200-day moving average in play at $1791, followed by a recent spike-high at $1815.
You may also like to read: Gold will act as an Inflation Hedge in the coming months