Gold Price Forecast: XAU/USD spikes above $1,970 after negative US data

• Gold price catches a bid after US data shows worsening jobless claims and decline in US GDP.
• Jerome Powell said privately the Federal Reserve expects one more rate hike this year but markets disagree.
• US Dollar suffers negative outlook versus major peers as Fed handcuffed by banking crisis – XAU/USD positive.

Gold price breaks out of its narrow range and enters $1,970s after US data supports a more positive outlook for the precious metal, on Thursday. Higher-than-expected Initial Jobless Claims and lower-than-forecast Gross Domestic Product suggest the US Federal Reserve may pause their rate-hiking agenda. Despite Fed Chairman Jerome Powell admiting privately that the Fed still sees one more rate hike this year, a market-based gauge of future rate hikes shows the odds favoring the Fed doing nothing. 

Lacklustre US data increases probability of Fed pausing rate hikes

Initial Jobless Claims for the week ending March 24 showed an unexpected rise to 198K on Thursday, well above the 196K forecast and the 191K previous. The data suggests the labour market may be weakening and could encourage the Fed to pause and not hike rates at their next meeting. In fact, after the release of the data, the probabilities of a rate hike as measured by Fed Funds Futures Curve rose a percentage point to 56% with chances of a 0.25% hike falling slightly to 44%. 

Gross Domestic Product Annualized (Q4) came out at 2.6% when it was expected to remain unchanged at 2.7%, indicating lower-than-expected growth. This will have further weighed on expectations that the Fed will continue raising rates to combat higher prices. The data is causing a sell-off in the Dollar, with the US Dollar Index (DXY) down 0.15% since the release, and this is supporting XAU/USD's rebound.

On Friday March 31 another important data release for XAU/USD, the Fed's prefered gauge of inflation, the US Core Personal Expenditures – Price Index (PCE) for February, is scheduled for release at 12:30 GMT. Economists expect the key Core PCE to decline to 0.4% from 0.6% previously, MoM, and to remain unchanged at 4.7% YoY. A substantially higher-than-expected result could prompt the Fed to raise rates more aggressively negatively impacting XAU/USD, and vice-versa for a lower-than-expected result. 

Powell privately believes in one more hike but markets pass-on-by

Republican Representative Kevin Hern reported to Bloomberg that Jerome Powell admitted he still sees one more rate hike, when he was in a private meeting with US lawmakers on how much further the central bank will raise interest rates this year.

Despite the revelation, the Fed Funds Futures Curve is still pricing in a higher chance of the Fed not hiking in May and the Fed cutting rates more than once in 2023.

Lower rates are generally positive for XAU/USD as they increase the opportunity cost of holding Gold vis-a-vis staying in cash or cash alternatives. The opposite is the case for higher rates.

Fundamentals undermine US Dollar outlook, support Gold price

Longer term, the outlook for the US Dollar suffers from a negative perception compared to its main counterparts, especially the Euro. This could result in losses for the US Dollar Index (DXY) which tracks the value of the currency against a weighted basket of counterparts. Such a weakening of the buck would be a bullish catalyst for XAU/USD.

In the case of the Euro, the US Dollar may decline due to a possible closing of the interest rate differential between the currencies, which hitherto has favored the Greenback. Currencies with higher rates gain an advantage via the effect of the carry trade in which investors profit by borrowing currencies in a low interest rate jurisdiction and using the money to buy a currency yielding a higher rate of return. 

The gap is likely to close because the Federal Reserve (Fed) is widely seen as reaching the end of its hiking cycle, whilst the European Central Bank (ECB) is still viewed as being at the start of its cycle. 

The Fed is also seen as more limited in how much higher it can raise rates compared to the ECB due to the different effects higher rates have on the two region’s banking systems. 

According to Andrew Stimpson, KBW Head of European Banks Research, Europeans are much less likely to withdraw their bank deposits and invest them in higher yielding money market funds – the root cause of the US banking crisis.  

“In Europe we haven’t got the same ease to switch into a money market fund, that is not a normal product that the general population will think of,” said Stimpson in an interview with Bloomberg News.

“The absolute level of rates in Europe is also lower than in the US, so if you are going to sit down on a Sunday afternoon and sort out your finances, whether you are going to switch from an overnight rate of zero to a timed deposit of 1.6-1.7% it is probably not going to make much  difference to you,” Stimpson added.

Other major currencies, including the Pound Sterling and the Yen may also strengthen versus the US Dollar. UK Core CPI recently rose to a relatively high 6.2% in February suggesting there will be more pressure on the Bank of England (BOE) to hike rates, with the effect of boosting the Pound.

In Japan, meanwhile, a monetary policy pivot is widely expected after the inauguration of a new governor for the Bank of Japan Ueda Kazuo and on the back of rising inflation. If the BOJ tightens policy after years of ultra-loose policy it could have a dramatic effect on the Yen. Japanese investors have bought an estimated $3.4 trillion of foriegn assets during decades of extremely low interest rates in Japan, seeking yield overseas due to a dearth of options at home. This outflow of capital threatens to tsunami back to Japan if the BOJ begins to raise rates there, substantially increasing demand for the Yen, according to a recent report by Bloomberg News. 

Gold price bullish trend despite lack of direction in short term 

XAU/USD is in an uptrend from a medium-term perspective. The price of the precious metal continues to make higher highs and lows on the daily chart shown below. Thus, according to the market maxim, “The trend is your friend until the bend at the end,” the technical outlook favors bulls.

Gold price: Daily Chart

A break above the key $2,009 March top would provide confirmation of further upside. The next target for Gold price would then lie at the $2,070 March 2022 highs. 

The key $1,934 March 22 swing low must hold for Gold bulls to retain the advantage. Yet, a break and close on a daily basis below that level would introduce doubt into the overall bullish assessment of the trend. Such a move would probably see a sharp decline to support at $1,890 supplied by the 50-day Simple Moving Average (SMA). 

There is a suggestion Gold price may be forming a triangle pattern as it oscillates to-and-fro between a limited range, and a closer inspection of the pattern on lower timeframes may offer traders opportunities to enter breakout trades at more daring levels than the broader range parameters highlighted above.