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The gold market saw a mild rebound Tuesday from the heavy decline seen Monday. Up less than $2 per ounce as of this writing, the gold market is well off its earlier session highs. As the day session closes in the green, however, the bulls have a small victory today. A weaker dollar and a decline in treasury yields may be giving the metal a boost today as it looks to discontinue yesterday’s selling.

The strong manufacturing report on Monday is likely still having an effect across markets today. The strength seen in the report suggests the Fed may have to stick with its recent aggressive tightening. Markets had been getting more hopeful about the Fed possibly taking a breather in the months ahead. Jerome Powell recently suggested the Fed would slow the pace of further rate hikes. Powell did also say that the Fed may need to leave rates higher for longer to get inflation under control. All things considered, the markets took Powell’s commentary as being dovish. Any hopes of the Fed taking a break from rate hikes or at least taking a less aggressive approach are likely to be market-moving. Stronger-than-expected economic data may say the opposite, however, and could leave the Fed stuck with its previous plans.

While a smaller rate hike is expected this month, markets may now be far more concerned with how the Fed plays the game in early 2023. The central bank has maintained that inflation is its number one priority and that unless inflation is under control nothing else really matters. The Fed may attempt to stick with this game plan, however, if the odds of recession increase further it could be forced to rethink its plans. Markets have become increasingly concerned over recession risk in the last few months, and the Fed may find itself having to choose between doing what needs to be done or appeasing stock investors.

If the Fed chooses to do what needs to be done, volatility and selling could rise dramatically across asset classes. If the Fed elects to try to keep investors happy, there may be some temporary respite, although it may lead to even larger problems down the road. The gold market may find itself range-bound until more clarity is seen about the Fed and its plans for policy next year. As 2022 winds down over the next three weeks, markets may become increasingly “boring” and could move less and less as investors begin to call it a year.

For the time being, the gold bulls will target a close above the $1800 level. If the bulls are able to produce a close above this key technical hurdle, it may open the door to additional gains as 2023 gets underway. If the bulls fail, however, and the bears assume control of the market, they will look to produce a close below $1700. Should that happen, the bears may see additional reinforcements enter the market, possibly taking prices quite a bit lower towards the $1500 level.