High US yields lift December Fed hike odds as gold edges below $4,000

• Gold retreats beneath $4,000 as the decline continues into a second day.
• US Core CPI beats forecasts for a third month, remaining at 0.3% MoM.
• US Treasury yields touch 5%, while the odds of a December Fed hike climb to 87%.

Selling pressure keeps Gold (XAU/USD) lower for a second consecutive day on Wednesday, with the price down 0.70% at $3,999 at the time of writing. Traders have fully priced in an interest rate increase by the Federal Reserve (Fed) after US inflation came in above expectations and Fed policymakers delivered hawkish remarks.

Can Gold withstand high US inflation, rising Treasury yields and hawkish Fed signals?

A stronger-than-forecast inflation report from the United States (US) showed that the Consumer Price Index (CPI) increased 0.4% MoM in October. Although slower than the previous 0.6% rise, the reading exceeded the 0.3% forecast. Attention centred on core CPI, however, after Fed Governor Christopher Waller warned that he would favour a 50 bps rate increase if core inflation reached 0.3%. For a third consecutive month, core CPI rose 0.3% MoM, beating the 0.2% estimate and leading investors to fully price in a 25 bps hike at the December meeting.

The CME FedWatch Tool shows that markets assign an 87% probability to a 0.25% Fed rate increase, leaving only a 13% chance of a larger 0.50% hike.

Bullion consequently moved lower, reflecting the tendency of the non-yielding metal to perform well when interest rates are lower.

Support for the US Dollar came from the US 10-year Treasury yield, which climbed nearly 12 basis points to 5%. At 102.90, the US Dollar Index (DXY) has reached a yearly high, gaining 0.67%. The index tracks the dollar against a basket of six currencies.

Hawkish signals also came from other Fed officials. Philadelphia Fed Anna Paulson said the “Fed will move more aggressively if inflation landscape worsens,” and Dallas Fed Lorie Logan said rates could be raised “more rapidly.”

A more measured stance came from Fed Governor Michelle Bowman and Kansas City Fed President Jeffrey Schmid, although both emphasised that inflation remains high. In Bowman's view, persistent inflation indicates that further work is needed. Schmid highlighted worrying price trends even when the energy picture is excluded.

Thursday's US calendar brings Initial Jobless Claims, housing figures and speeches from Fed officials. The Producer Price Index (PPI) follows on Friday.

XAU/USD technical outlook: How far could Gold fall after breaking below $4,000?

Sellers are gathering momentum after Gold broke below $4,000, bringing five-day lows into view. A lower low in each of the past three trading sessions points to the possibility of additional declines.

Further evidence of sellers' control comes from the Relative Strength Index (RSI), which is turning bearish as well.

Initial support for XAU/USD lies at $3,919, the daily low recorded on November 4. Below that is the October 30 year-to-date low of $3,879. On a recovery, $4,000 represents the first major resistance level. A break above it would open the way towards the psychological $4,050 zone and then $4,100. Further up, attention turns to the confluence of the 50- and 100-day Simple Moving Averages (SMAs), positioned at $4,177 and $4,200, respectively.