Gold Price Forecast: Will XAU/USD sustain its record rally on dovish Fed outlook?
- Gold price pulls back from fresh record highs of $2,223 set early Asia on Thursday.
- US Dollar extends post-Fed outcome decline amid weak US Treasury yields, better mood.
- Gold price confirms a Bull Flag on the daily chart, RSI goes overbought again.
Gold price is correcting from a fresh all-time high of $2,223 reached in early Asian trading on Thursday, although defends the $2,200 threshold amid sustained weakness in the US Dollar (USD) and the US Treasury bond yields. Markets digest the dovish US Federal Reserve (Fed) no-interest rate change decision on Wednesday.
Gold price shines on dovish Fed policy outlook
Gold price outshines for the second straight day on Thursday, resuming its record-setting rally, inspired by the Fed’s dovish outlook on interest rates.
The US Dollar tumbled alongside the US Treasury bond yields after the Fed's economic projections, the so-called Dot Plot chart, still predicted three rate cuts this year as seen in December. Markets had begun pricing two Fed rate cuts this year after two consecutive months of higher inflation readings.
The median Fed dot plot for 2024 was unchanged despite a 0.2% increase in the median 2024 Core PCE inflation. This was perceived as dovish by markets, throwing the Greenback under the bus while driving Gold price to a new all-time high beyond the $2,200 threshold.
The Fed kept the key rates unchanged between the 5.25% to 5.50% target range on Wednesday, with Chair Jerome Powell emphasizing that recent high inflation readings had not changed the underlying "story" of slowly easing price pressures in the United States (US).
Markets are now wagering a 75% probability that the Fed will begin easing in June, up from 59% on Tuesday, according to the CME Group's FedWatch Tool.
Looking ahead, the S&P Global US preliminary PMIs and Fedspeak will remain in focus for a fresh boost to Gold price.
Gold price technical analysis: Daily chart
As charted on the daily sticks, Gold price confirmed a Bull Flag after closing Wednesday above the falling trendline resistance at $2,161.
If Gold buyers regain poise, the next relevant bullish targets are seen at the record high of $2,223 the $2,250 psychological level.
The 14-day Relative Strength Index (RSI), however, is in the highly overbought terrain, suggesting that the recent pullback could likely extend before the upside resumes.
On a daily closing below the $2,200 mark, Wednesday’s high of $2,189 will be put to the test.
Acceptance below the latter will open up a fresh downside toward Monday’s low of $2,146, below which the falling trendline support at $2,138 will come to buyers’ rescue.
Gold FAQs
Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.
Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.
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Author
Dhwani Mehta
FXStreet
Residing in Mumbai (India), Dhwani is a Senior Analyst and Manager of the Asian session at FXStreet. She has over 10 years of experience in analyzing and covering the global financial markets, with specialization in Forex and commodities markets.
