Gold Price Forecast: XAU/USD appears ‘buy the dips’ trade amid dovish Fed bets

Gold price is consolidating the previous decline so far this Wednesday, hanging close to the $1,900 threshold. Gold sellers remain in control amid a better market mood and broadly subdued United States Dollar (USD), as the dust settles over the US banking sector crisis and Tuesday’s critical US Consumer Price Index (CPI) data.

US Consumer Price Index backs 25 bps Federal Reserve rate hike

Swaps pricing is back to positioning for the Federal Reserve to lift rates by a quarter percentage point next week after the odds of an increase had slipped to nearly 50-50 on Monday. This comes after the United States Consumer Price Index (CPI) came in mostly in line with expectations, except for the monthly Core figure, which arrived a tad hotter than expected. The market reaction to the high-impact US CPI data was disappointing, as the US Dollar remained subdued, despite a fresh spike in the US two-year Treasury bond yields. The odds of a 25 bps March Fed rate hike got boosted on the CPI release while markets have wound up their bets of a Fed pause this month by more than half.

On an annualized basis, the US Consumer Price Index data came in at 6.0% in February vs. 6.0% expected and 6.4% previous. The Core CPI, which excludes volatile food and energy prices, arrived at 5.5% YoY in February vs. 5.5% expected and January’s 5.6%.  The headline CPI data stood at 0.4% MoM in February vs. 0.4% expected, compared with a 0.5% increase reported in January. The Core CPI came in at 0.5% MoM in the reported month vs. 0.4% expected and 0.4% previous.

Despite expectations of a 25 bps March Fed rate hike gathering momentum, the US central bank is still on track to slow down its pace of tightening. Following Fed Chair Jerome Powell’s Congressional testimony, earlier this month, markets priced in a 50 bps rate hike for March. But tables turned after the Silicon Valley Bank (SVB) fallout, which triggered massive volatility in the United States bond market. The two-year US Treasury bond yields eroded as much as 60 basis points (bps) to breach the 4.0% level on Monday, registering its biggest multi-day decline since 1987.

Dovish Fed expectations could help limit the corrective downside in the Gold price. At the time of writing, Gold price is trading at $1,901, losing 0.15% on the day. The losses appear capped, courtesy of the downside consolidation phase in the US Dollar across its major peers.

Strong Chinese data adds to the calmer market mood

The safe-haven US Dollar suffers from a relatively calmer market mood, as the dust settles over the US banking rout aftermath. Investors take comfort in believing that the US banking stress was probably limited to a couple of small banks. A rebound in China’s Retail Sales and rising Industrial Production signal a steady recovery in the world’s second-biggest economy, adding to the renewed market optimism.

China’s January-February Retail Sales YoY, jumped 3.5% vs. 3.5% expected and -1.8% previous while the country’s Industrial Production came in at 2.4% YoY vs. 2.7% estimated and 1.3% prior. Meanwhile, the Fixed Asset Investment increased to 5.5% YTD YoY in January-February vs 4.5% expected and 5.1% last.

Attention now turns toward the United States Retail Sales and Producer Price Index (PPI) data, due for release on Wednesday at 12:30 GMT. The data could help shed more light on the state of the US economy and the factory-gate inflation, eventually affecting the market pricing of the Fed rate hike track.

Gold price technical analysis: Daily chart

Gold price managed to close Tuesday above the $1,900 threshold yet again, despite facing stiff resistance just shy of the February 3 high of $1,919.

The 14-day Relative Strength Index (RSI) trades listlessly but well above the midline, suggesting that Gold price remains a good buying opportunity on pullbacks.

The previous day’s low of $1,895 will be tested on the further downside in the Gold price. Floors will open toward the mildly bullish 50-Daily Moving Average (DMA) at $1,875 on additional declines. But the February 9 high of $1,890 could help limit the losses for Gold buyers before.

Alternatively, Gold buyers need to regain foothold above the $1,910 round figure. Daily closing above the $1,919 barrier is needed to resume the uptrend toward the year-to-date highs of $1,960. The next upside target is envisioned at the $2,000 threshold.