Why Gold price faces critical positioning trap ahead of the Fed decision

The Federal Reserve’s upcoming interest-rate decision is key for Gold’s price. As Jerome Powell prepares for his final post-policy meeting press conference, the precious metal’s market is caught in a positioning trap that could either trigger a significant unwind below key support levels or ignite a breakout that leaves late buyers stranded at the top.

Gold hinges on the next Fed’s move

Gold is currently coiling ahead of the Fed event risk. The metal's next big move could be in the making as all eyes are on the outgoing Fed Chair Jerome Powell’s remarks. While traders are expecting the Fed to hold rates steady in the range of 3.5%-3.75%, the question isn’t what they do today, but rather what they say they will do next.

Markets have priced out an interest rate cut at least until September, while predicting about a 65% probability that the Fed will hold rates by the end of the year. The March Summary of Economic Projections (SEP) continued to show one 25 bps rate cut this year. However, the Minutes of the March monetary policy meeting highlighted upside risks to inflation due to the Iran war, implying that a rate hike could also be on the table later this year.

The Fed’s dilemma: Inflation vs. the labor market

Expectations of a hawkish pivot by the Fed are fueled by a 40% surge in Oil prices due to a protracted US-Iran conflict. Meanwhile, the US labor market conditions appear weak, despite recent signs of stabilization. This puts the Fed in a tough position, leaving markets guessing on whether it will prioritize the labor market or rising inflation.

Inflation has remained closer to 3% than the Fed’s 2% target in recent months. Add to that the energy shock, and the policy outlook becomes increasingly complicated. Therefore, Powell’s tone during his last post-policy meeting press conference will be closely scrutinized for any hints on the possibility of a rate hike this year. Kevin Warsh is set to succeed Powell as the new Fed Chair starting May 15.

Two scenarios for Gold:

Scenario 1: A hawkish breakdown

Gold remains a “sell on rallies” trade ahead of the Fed meeting. If Powell leaves the door open for a rate hike this year to counter inflation risks, the USD could gain traction, weighing negatively on non-yielding assets such as Gold. Such a scenario could drag Gold back toward the $4,400 level on a sustained break of the $4,550 demand area.

Scenario 2: A dovish bullish breakout

Alternatively, Gold could break through the cluster of resistances near $4,750 should Powell shrug off energy shock-led inflation concerns and prioritize supporting the labor market. This would be read as dovish by markets. In this bullish scenario for Gold, the metal could re-attempt the 50-day SMA near $4,860.

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)