- Gold finds support at $2,630 but remains capped ahead of the Fed’s decision.
- The market is bracing for a Fed “hawkish cut” that might boost the US Dollar and weigh on Gold.
- XAU/USD remains under pressure, with upside attempts capped below $2,665.
Gold (XAU/USD) is practically flat on Wednesday after bouncing up from a one-week low the previous day. The precious metal remains on the defensive as the market braces for the outcome of the last Federal Reserve’s (Fed) meeting of the year.
The Fed is widely expected to cut interest rates by 25 basis points (bps), but the economic and rate hike projections will likely reveal a hawkish turn on the central bank’s forward guidance.
Recent US data shows that economic activity remains robust, consumption is buoyant, and inflationary pressures are high. Beyond that, US President-elect Donald Trump’s policies are expected to fuel price pressure higher.
This has forced investors to scale back monetary easing expectations, which is fuelling a sharp rebound in US Treasury yields and weighing on the yellow metal.
Gold remains vulnerable amid fears of a hawkish Fed
- US Retail Sales released on Tuesday revealed a 0.7% increment in November, up from an upwardly revised 0.5% rise in October and beating expectations of a 0.5% increase.
- Consumption amounts to more than 60% of the US GDP, and these figures endorse the view of US economic exceptionalism in the context of a global economic slowdown.
- US data released earlier this week showed an unexpected improvement in services activity, pointing to healthy economic growth in the fourth quarter.
- Futures markets are almost fully pricing a 25 bps interest rate cut on Wednesday, according to the CME Group’s FedWatch Tool, but less than a 30% chance of more than two quarter-percentage cuts in 2025.
Technical analysis: XAU/USD consolidates losses with upside attempts limited below $2,665
Gold has found some support at $2,630 and is consolidating recent losses, with investors looking from the sidelines ahead of the Fed decision. The short-term bearish trend, however, remains intact, with resistance at $2,665 capping upside attempts.
From a wider perspective, a potential double top at $2,720 suggests that a deeper correction is on the cards.
Immediate support is at $2,630 (December 17 low), while the $2,615-$2,605 area (November 25 and 26 lows) is the neckline of the previously mentioned double top. Below there, the next target would be November’s trough, at $2,540. On the upside, resistances are at the mentioned $2,665 (December 16 high) and 2,690 (December 13 high).
XAU/USD 4-Hour Chart
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
