Gold outlook: Fed decision this week

Gold bulls appear to have regained control of the precious metal’s price. In today’s report we are to have a look upcoming interest rate decision by the Fed as well as the escalating tensions between India and Pakistan. For a rounder view we intend to conclude the report with a technical analysis of gold’s daily chart.    

Fed interest rate decision to occur this week

The Fed’s interest rate decision is set to occur this Wednesday. The majority of market participants are currently anticipating the bank to remain on hold with FFF, implying a 98.1% probability for such a scenario to materialize at the time of this report. Therefore, we turn our attention to the bank’s accompanying statement in addition to Fed Chair Powell’s press conference which is set to occur following the bank’s decision. However, before delving into the possibilities of the narrative which may emerge from the accompanying statement and the press conference, let’s take a look into last week’s financial releases. Specifically, the release of the US Core PCE rates for March, which confirmed the anticipated easing of inflationary pressures in the US economy by coming in at 2.6% and the US Employment data for April, which showcased a stronger than expected labour market when looking at the NFP figure. The two aforementioned financial releases may have eased market worries and in part some of the concerns about a potential resurgence of inflationary pressures in the US economy. Thus, the financial releases may have opened the door for the Fed to adopt a more “dovish” stance, such as implying that they may cut interest rates in the near future. Yet at the same time, the relative progress against inflation with the employment market remaining relatively tight, could also provide the Fed with the option to remain on hold for as long as they deem necessary. The scenario in which the Fed adopts a more “dovish” tone could weigh on the dollar whilst potentially aiding the precious metal’s price, given their inverse relationship. On the other hand, should the bank showcase a willingness to remain on hold aka the second scenario we mentioned previously, potentially due to the persistent risks of the US’s trade wars, it may have the opposite effect, with the dollar potentially gaining whilst weighing on gold’s price. In our view, we would not be surprised to see a slightly more dovish rhetoric emerging from the Fed in their accompanying statement, whilst highlighting the continued risks of the US’s trade policies.

India-Pakistan tensions persist

Tensions between India and Pakistan have been on the rise since the 22nd of April, when an attack targeted Hindu tourists in the disputed Kashmir region, which resulted in 26 fatalities. Following the attack, India accused Pakistan of involvement, saying that two of the three suspected attackers were Pakistani nationals, according to a report by Reuters. Starting with India suspending the Indus Waters Treaty with Pakistan on the 24th of April, to Pakistan holding two missile tests in three days, and India unveiling plans for civil defence drills in several areas starting today. The increasing tensions between the two nuclear-armed nations have sparked concerns that the situation may escalate to military conflict, which in turn may funnel safe haven inflows into the precious metal’s price given its status as a safe haven asset.

Technical analysis

XAU/USD daily chart 

• Support: 3350 (S1), 3235 (S2), 3115 (S3). 

• Resistance: 3500 (R1), 3650 (R2), 3805 (R3). 

On a technical level, gold’s price appears to be moving in an upwards fashion, having cleared our resistance now turned to support at the 3350 (S1) level. We opt for a bullish outlook for the precious metal’s price, and supporting our case is the RSI indicator which currently registers a figure near 60 implying a bullish market sentiment, in addition to the upwards moving trendline which was incepted on the 9th April. For our bullish outlook to continue we would require a break above the 3500 (R1) resistance line with the next possible target for the bulls being the 3650 (R2) resistance level. On the flip side for a bearish outlook, we would require a clear break below the 3350 (S1) support level with the next possible target for the bears being the 3235 (S2) support line. Lastly, for a sideways bias we would require gold’s price to remain confined between the 3350 (S1) support level and the 3500 (R1) resistance line.