If an asset goes uphill too quickly, the risks of its sale increase dramatically. Typical examples are the euro and gold. From the levels of the September lows to the January peak, the EURUSD pair grew by 15.5%, the precious metal by 21%. In such conditions, falling off a cliff is a trivial matter. All it takes is a reason. And Christine Lagarde's inarticulate rhetoric at the press conference following the results of the ECB's first meeting in 2023 and strong statistics on the American employment for January was enough.

Curiously, the shift in investor sentiment came amid the Fed's intention to slow down the pace of monetary tightening and the strong U.S. jobs report for January, which cast doubt on that intention. The futures market now expects the federal funds rate to rise to 5.25% and does not exclude its increase to 5.5%, which is bad news for both stocks and bonds. The profitability rally of the latter has become one of the drivers of the collapse of XAUUSD.

Dynamics of gold and bond yields

Markets have been going against the Fed over the past few months, not paying attention to the fact that the central bank raised the federal funds rate three times during this period and signaled its future growth. But the investor reaction was in style, and who cares? They seriously counted on a dovish turn in the second half of 2023, which put pressure on the dollar.

It is the fall of the USD index, according to StoneX, that will help gold to reach $2,070 per ounce at the end of the year. Interest in the U.S. dollar is melting before our eyes, liquidity is looking for new homes, and traces of market professionals were clearly visible in the movement of gold in early 2023. If we add to this the geopolitical and global tensions that are pushing more players, including central banks, to the precious metal, then the current drop in XAUUSD quotes is nothing more than a correction.

Dynamics of the U.S. dollar and gold

Note that it was the active purchases of gold by central banks in 2022, the highest since 1967, that became one of the drivers of price growth at the end of the year. Their actions were connected, among other things, with the freezing of part of the foreign exchange reserves of the Bank of Russia due to the armed conflict in Ukraine.

The further dynamics of XAUUSD may depend on U.S. inflation. If consumer prices unexpectedly pick up again in January, the proposed ceiling on the federal funds rate could rise to 5.5%, and investors will finally abandon the idea of a dovish Fed reversal in 2023, which will support the U.S. dollar. On the contrary, a further slowdown in CPI will improve global risk appetite, weaken the U.S. currency and extend a helping hand to the precious metal.

Technically, on the daily chart, gold's return to the fair value range of $1,876–$1,946 per ounce is the first sign of bearish weakness. If buyers manage to push quotes above the $1,892 and $1,900 pivot points, risks of upward trend restoration will increase.