Gold price flat-lines above one-week low, awaits the crucial Fed decision on Wednesday
- Gold price oscillates in a range and is influenced by a combination of diverging forces.
- Hawkish Fed expectations, elevated US bond yields and a bullish USD cap the upside.
- Geopolitical risks lend some support to the XAU/USD ahead of the key FOMC meeting.
Gold price (XAU/USD) struggles to capitalize on the previous day's bounce from the $2,145 region, or over a one-week low and oscillates in a range during the Asian session on Tuesday. The robust US consumer and producer inflation figures released last week fuelled speculations that the Federal Reserve (Fed) could modify its forward guidance to two 25 basis points rate cuts in 2024 instead of the three projected previously. This, in turn, remains supportive of elevated US Treasury bond yields, which underpin the US Dollar (USD) and act as a headwind for the non-yielding yellow metal.
The markets, however, are still anticipating that the Fed will begin its rate-cutting cycle as early as the June policy meeting. This, combined with ongoing geopolitical tensions, might continue to provide a floor to the Gold price and help limit the downside. Traders might also prefer to wait on the sidelines ahead of the crucial two-day FOMC monetary policy meeting starting this Tuesday. The Fed is scheduled to announce its decision on Wednesday and investors will look for fresh cues about the rate-cut path, which will play a key role in driving the USD and provide a fresh impetus to the precious metal.
Daily Digest Market Movers: Gold price struggles to lure buyers amid mixed fundamental cues, ahead of FOMC
- The stronger US inflation data fuelled speculations that the Federal Reserve will keep interest rates elevated, which, in turn, fails to assist the non-yielding Gold price to build on Monday's bounce from over a one-week low.
- Markets are now pricing in less than three 25 basis point rate cuts this year and about a 51% chance that the Fed will begin the rate-cutting cycle at the June meeting, down sharply from expectations at the start of the year.
- Expectations that the Fed will stick to the higher-for-longer interest rates narrative push the yield on benchmark 10-year US government bond to a three-week high, underpinning the US Dollar and capping the commodity.
- The prolonged Russia-Ukraine war, along with the unrest in the Middle East, might continue to offer some support to the safe-haven XAU/USD and help limit deeper losses ahead of the crucial FOMC meeting starting today.
- Ukraine stepped up drone strikes on Russian oil refineries last week, while Israeli Prime Minister Benjamin Netanyahu confirmed plans to push into Gaza's Rafah enclave, contributing to a climate of uncertainty.
- The focus, meanwhile, will be on whether Fed policymakers change their projections, or dot plots, for the economy and rate cuts for this year and the next two, which will determine the near-term trajectory for the XAU/USD.
Technical Analysis: Gold price could slide further once the $2,150 support is broken decisively
From a technical perspective, the recent pullback from the record peak stalled near the $2,145-2,144 support zone, which should now act as a key pivotal point for the Gold price. A convincing break below will expose the next relevant support near the $2,128-2,127 zone before the XAU/USD extends the corrective decline further towards the $2,100 round figure.
On the flip side, the $2,175-2,176 region now seems to have emerged as an immediate strong barrier, which if cleared should allow the Gold price to challenge the record peak, around the $2,195 area touched last week. Some follow-through buying beyond the $2,200 mark will set the stage for the resumption of the uptrend witnessed since the beginning of this month.
Gold FAQs
Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.
Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.