Gold Price Forecast: Fed’s hawkish pause weighs on XAU/USD, $1,918 and ECB in sight

Gold price is extending the downside toward $1,930 as Asian traders react negatively to the hawkish US Federal Reserve (Fed) outlook, which saved the day for the United States Dollar (USD).

Federal Reserve Dot Plot rescues the US Dollar

At its monetary policy meeting on Wednesday, Federal Reserve maintained the Fed funds rate at 5.0%-5.25%, bringing a halt to its interest-rate hiking cycle for the first time since early 2022. However, the Fed’s Statement of Economic Projections, the so-called Dot Plot chart, portrayed a hawkish picture with two more rate hikes ahead. The Dot Plot showed that the terminal rate projection for end-2023 was revised higher to 5.6% from 5.1% in March. As a rate hike pause by the Federal Reserve was fully baked in, the Dot Plot stole the show and triggered an impressive rebound in the US Dollar along with US Treasury bond yields across the curve. The benchmark 10-year US Treasury bond yields jumped to retest the 3.85% level in an immediate reaction to the Fed verdict, trading 0.61% higher on the day at 3.822%.

During the post-meeting press conference, Federal Reserve Chairman Jerome Powell said, “we are not done yet. The Fed will continue to watch how the labor market moves for insights that can then help the central bank decide how to move interest rates going forward.” His words prompted markets to believe that the July meeting will be a "live" one, with odds for a 25 basis points (bps) rate hike next month increasing to around 70%, compared with about 60% pre-Fed announcements.

The non-interest-bearing Gold price, therefore, reversed the early bounce and settled Wednesday near daily lows while extending the bearish momentum early Thursday. Markets will continue to closely scrutinize incoming United States economic data to reprice Fed expectations.

In the meantime, Gold traders turn their attention toward the European Central Bank (ECB) monetary policy announcements due later in the day at 12:15 GMT. The ECB is widely expected to raise key rates by 25 bps, although the Staff Economic Projections and President Christine Lagarde’s presser will hold the key to determining the future path of monetary policy. Markets are expecting rates to peak in July, contemplating one more interest-rate hike after June’s one, while likely predicting a pause in September. Should ECB deliver a hawkish hike, Gold price is likely to come under additional selling pressure.

Gold price technical analysis: Daily chart

As observed on the daily chart, a bearish 21-Daily Moving Average (DMA) capped the Gold price rebound and initiated a fresh downswing thereafter.

Gold price briefly breached the critical horizontal 100-DMA at $1,942 but managed to close the day just above the latter.

However, Gold bears are flexing their muscles early Thursday, sending rates back below the 100-DMA support. Should the $1,930 round figure give way, a sharp sell-off toward the March 17 low of $1,918 cannot be ruled out. Further south, the $1,900 threshold will be on Gold sellers’s radars.

The 14-day Relative Strength Index (RSI) is pointing south below the midline, suggesting that the risks remain skewed to the downside. 

Conversely, recapturing the 100-DMA support-turned-resistance at $1,942 on a sustained basis is critical to attempt a recovery toward the $1,950 psychological level. The bearish 21-DMA at $1,957 will be a tough nut to crack for Gold buyers. Acceptance above the latter is needed to challenge the next relevant hurdle around the $1,970 mark.