Gold Price Forecast: Down for third straight week, on the defensive ahead of the Fed

• Gold is looking south, having eked out the longest weekly losing streak since August 2018.
• Prices could drop to key support at $1,474 ahead of Wednesday's Fed decision.
• The market is priced for a 25 basis point rate cut. Gold could find acceptance below 50-day MA if the Fed remains neutral or sounds hawkish.
• A dovish surprise will likely put a strong bid under the yellow metal.

Gold is set to end lower for the third straight week and will likely remain on the defensive in the run-up to Wednesday's Federal Open Market Committee (FOMC) meeting.

The yellow metal is currently changing hands at $1,487 per Oz, representing 1.29% losses on a weekly basis. Prices fell 0.90% and 0.42%, respectively, in the preceding two weeks.

The three-week losing run is the longest since August 2018.

Again, the latest weekly loss could be associated with the surge in the US bond yields. Notably, the 10-year US Treasury yield has added 35 basis points, courtesy of easing US-China trade tensions and upbeat US data.

The US President Trump delayed the decision to impose an additional 5% tariff on $250 billion worth of Chinese goods.

Further, the data released earlier today showed the consumer spending, as represented by Retail Sales, rose more than expected in August, alleviating recession fears.

All-in-all, there was little scope for safe havens like Gold to shine. The European Central Bank did dole out massive stimulus but failed to put a strong bid under the yellow metal, possibly due to a sharp rise in the US yields.

Looking forward

The focus is on the US Federal Reserve's (Fed) rate decision, scheduled on Wednesday.

The market expects the Fed to cut rates by 25 basis points and repeat its easing bias. The Fed is also expected to signal one more rate cut via dot plots and maintain a non-committal stance.

The market is already priced for a 25 basis point rate cut. Some observers, including US President Trump, want a bigger rate cut. In fact, Trump put out a tweet earlier this week, asking the Fed to cut rates to zero or even lower.

The Fed, however, has little room to surprise with a 50 basis point rate cut or signal aggressive easing. This is due to the fact that the consumer spending is holding up well amid rising external risks and there is not enough evidence to suggest the economy is heading toward recession.

Gold, therefore, is expected to trade in the red in the first half of the next week and will likely pick up a bid in the second half only if the Fed offers a dovish surprise via a bigger-than-expected rate cut, the significant downward revision of growth, inflation and interest rate forecasts.

The Bank of Japan (BOJ), Swiss National Bank (SNB) and the Bank of England (BOE) are also scheduled to publish their rate decisions next week. The BOJ and the SNB are already running negative interest rate policies, meaning the marginal efficiency (utility) of additional easing is negative.

So, dovish surprises (rate cuts) by the SNB and BOJ, if any, are unlikely to result in a significant depreciation of their respective currencies and may fail to put a bid under Gold. China will report industrial production and retail sales on Monday. A big beat on expectations will likely add to bearish pressures around the yellow metal. 

Technical Outlook

The long upper wicks attached to weekly candles indicate strong "sell the rise" mentality in the market.

On the daily chart, the yellow metal has dived below the trendline connecting May 30 and Aug. 1 highs, bolstering the bearish view put forward by the double top breakdown, confirmed on Sept. 6.

The 5- and 10-day moving averages (MA) continue to trend south and the relative strength index (RSI) is reporting bearish conditions with a below-50 print.

The metal looks set to test the 50-day moving average (MA), currently at $1,474 ahead of the Fed.

If the Fed sounds dovish, prices will likely bounce up strongly from the 50-day MA, although a bullish reversal would be confirmed only above $1,524 (Thursday's high).

If the Fed retains non-committal stance or sounds hawkish, a deeper sell-off to $1,450 could be seen.

Weekly chart

Daily chart

Gold forecasts