- 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 exert pressure.
- Geopolitical tensions could lend support to the XAU/USD ahead of the FOMC meeting.
Gold price (XAU/USD) attracts fresh sellers heading into the European session on Tuesday and for now, seems to have stalled the overnight modest recovery move from the $2,145 region, or over a one-week low. Expectations that the Federal Reserve (Fed) will stick to its higher-for-longer interest rates narrative in the wake of still-sticky inflation in the US remain supportive of elevated US Treasury bond yields. This, in turn, lifts the US Dollar (USD) to a nearly two-week high and is seen as a key factor undermining the non-yielding yellow metal.
Meanwhile, the markets are still pricing in the possibility that the Fed will begin its rate-cutting cycle as early as June. This, along with ongoing geopolitical tensions, could offer some support to the safe-haven Gold price and help limit losses. Traders might also refrain from placing aggressive directional bets ahead of the crucial two-day FOMC policy meeting starting this Tuesday. Investors will look for cues about the Fed’s rate-cut path, which will play a key role in driving the USD demand and provide some meaningful impetus to the precious metal.
Daily Digest Market Movers: Gold price edges lower amid as reduced Fed rate cut bets lift USD to two-week high
- 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 bears might wait for acceptance below $2,145 support before placing fresh bets
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.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
