As widely expected, the Fed announced a decision to end the unprecedented quantitative easing program by gradually unwinding its $4.5 trillion balance sheet, from next month onwards, and shared that another interest rate hike is likely this year. 

This important announcement, however, didn’t come as much of a surprise to the market, consistent as it was with Federal Reserve communications over recent months. 

The balance sheet shrinkage will start at a slow pace, with an initial monthly reduction amount of $6 billion for treasuries and $4 billion for Agency Mortgage Backed Securities (MBS). The amount will gradually increase in three-month intervals until it hits $30 billion for treasuries and $20 billion for MBS. 

The treasury yield curve shifted upwards as a result, with the 10-year treasury yield climbing from 2.24% to 2.27%. This means that the borrowing cost and required rate of return has started to respond to monetary policy shifts, and the impact to the real economy will gradually play out in future. 

The sustainability of quantitative tightening measures is subject to future economic performance and financial markets’ durability. The central bank has the flexibility to adjust the pace and amount of tightening according to changes in market conditions, so investors are not too worried about the consequences right now. 

The current probability of a December rate hike, according to the CME’s FedWatch tool, shot up from 56% to 68% in a day. The US dollar index rebounded sharply to the 92.3 area this morning, as the FOMC strengthened the outlook of future rate hikes and monetary tightening, as fundamental elements continued to show signs of improvement. 

Precious metal prices were hammered by the strong US dollar. The FOMC result also cleared the uncertainty in respect of monetary policy outlook, thus leading to decreased demand for safety assets. Technically, both gold and silver prices were trending lower with their 10-Day Moving Average and SuperTrend (10,1.5) lines sloping downwards, a sign that the bears are taking control. Their immediate support levels can be found at $1,295 and $16.78 respectively. 

Technical Analysis:

Gold - Cash

  • 10-Day Simple Moving Average sloped downwards
  • SuperTrend (10,15) has flipped downwards, suggesting that a downtrend was formed 
  • Immediate support level at 1,295 with the next support at 1,282
  • Momentum indicator MACD has formed a bearish crossover, indicating strong downward momentum

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