Gold Prices in Turmoil as Treasury Yields Rebound and US Dollar Dominates

Volatility increased on Tuesday as U.S. markets reopened after Monday's Martin Luther King, Jr. holiday. The trading session saw U.S. Treasury rates blast higher, with the 10-year bond climbing above the psychological 4.0% - a move that boosted the U.S. dollar against most peers.

The rally in the U.S. dollar, coupled with soaring yields, also dealt a blow gold (XAU/USD), pushing its prices more than 1.25% lower on the day and prompting many investors to reassess the bullish outlook for the precious metal, which became a consensus trade following the Federal Reserve's pivot at its December meeting.

The catalyst for Tuesday's moves was a reassessment of the Fed's monetary policy after expectations shifted away from fundamentals and became extremely dovish recently. Comments from Fed Governor Christopher Waller that policymakers should not rush to slash rates until it is clear that lower inflation can be sustained reinforced market dynamics, further weighing on bullion.

With the U.S. economy holding up exceptionally well and progress on disinflation stalling, the U.S. central bank will be reluctant to ease its stance materially this year, as looser financial conditions could complicate the path to price stability. Once Wall Street recognizes this reality, traders could start unwinding deep interest-rate cut bets, bolstering the greenbacks recovery – a bearish outcome for gold.

Gold plunged on Tuesday, completely erasing last month's gains and inching ever closer to the 50-day simple moving average, a key support indicator located slightly above the $2,010 area. Bulls must defend this technical floor tooth and nail; failure to do so could trigger a move towards $1,990, followed by $1,975.

On the flip side, if buyers return and spark a bullish reversal, resistance emerges at $2,045-$2,050. Taking out this ceiling decisively could be difficult, but a breakout could create the right conditions for a rally toward $2,085, the late December peak. On further strength, XAU/USD could be on its way to retesting its record.