Gold price struggles to lure buyers, holds steady above one-week low ahead of FOMC meeting


  • Gold price ticks lower amid reduced Fed rate cut bets, elevated US bond yields and stronger USD. 
  • Geopolitical tensions could lend some support to the safe-haven XAU/USD and help limit losses.
  • Traders might also prefer to move to the sidelines ahead of the key two-day FOMC policy meeting.

Gold price (XAU/USD) attracts some sellers on Tuesday and stalls the previous day's modest bounce from the $2,145 zone, or over a one-week low. The stronger US inflation figures released last week fuelled speculations that the Federal Reserve (Fed) will stick to its higher-for-longer interest rates narrative and also modify its forward guidance to two 25 basis points rate cuts in 2024 instead of the three projected previously. This remains supportive of elevated US Treasury bond yields and lifts the US Dollar (USD) to a nearly two-week high, which, in turn, is seen undermining the non-yielding yellow metal. 

That said, the markets are still expecting the Fed to start the rate-cutting cycle as early as the June policy meeting. This, along with persistent geopolitical tensions stemming from the protracted Russia-Ukraine war and conflicts in the Middle East, could offer some support to the safe-haven Gold price and help limit losses. Traders might also prefer to wait for more cues about the Fed's rate-cut path before placing fresh directional bets around the XAU/USD. Hence, the focus remains on the crucial FOMC decision on Wednesday, which will drive the USD demand and provide a fresh impetus to the precious metal.

Daily Digest Market Movers: Gold price is weighed down by hawkish Fed expectations and sustained USD buying

  • The stronger US inflation data fuelled speculations that the Federal Reserve will keep interest rates elevated, which, in turn, fails to assist the non-yielding Gold price to build on Monday's bounce from over a one-week low.
  • Markets are now pricing in less than three 25 basis point rate cuts this year and about a 51% chance that the Fed will begin the rate-cutting cycle at the June meeting, down sharply from expectations at the start of the year.  
  • Expectations that the Fed will stick to the higher-for-longer interest rates narrative push the yield on benchmark 10-year US government bond to a three-week high, underpinning the US Dollar and capping the commodity.
  • The prolonged Russia-Ukraine war, along with the unrest in the Middle East, might continue to offer some support to the safe-haven XAU/USD and help limit deeper losses ahead of the crucial FOMC meeting starting today.
  • Ukraine stepped up drone strikes on Russian oil refineries last week, while Israeli Prime Minister Benjamin Netanyahu confirmed plans to push into Gaza's Rafah enclave, contributing to a climate of uncertainty.
  • The focus, meanwhile, will be on whether Fed policymakers change their projections, or dot plots, for the economy and rate cuts for this year and the next two, which will determine the near-term trajectory for the XAU/USD.

Technical Analysis: Gold price manages to hold above the $2,145 support, seems vulnerable to weaken further

From a technical perspective, the recent pullback from the record peak stalled near the $2,145-2,144 support zone, which should now act as a key pivotal point for the Gold price. A convincing break below will expose the next relevant support near the $2,128-2,127 zone before the XAU/USD extends the corrective decline further towards the $2,100 round figure.

On the flip side, the $2,175-2,176 region now seems to have emerged as an immediate strong barrier, which if cleared should allow the Gold price to challenge the record peak, around the $2,195 area touched last week. Some follow-through buying beyond the $2,200 mark will set the stage for the resumption of the uptrend witnessed since the beginning of this month.

 

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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