Gold Price Forecast: XAU/USD bulls move in ahead of key events and pending Federal Reserve

Gold price has been a touch higher at the start of the week, digging into shorts that have positioned themselves on prospects of a move into the longs that accumulated towards the end of last week's trading. XAU/USD rallied from a technical support area around the $1,900 psychological level and petered out in the $1,930s on the assumption that the Federal Reserve will slow the pace of rate hikes.

The US Dollar index DXY dipped in recent trade as the initial balance for the week eats into the greenback, sinking it towards a death line on the charts and taking on last week's support area in the 101.70s. The move is fuelling the Gold price higher, making it cheaper for holders of other currencies. Lower US Treasury yields tend to steer investors towards the zero-yield yellow metal.

Federal Reserve expectations

There are mixed feelings surrounding the Federal Reserve. World interest rate probabilities, WIRP, suggest a 25 bp Federal Reserve hike on February 1 is fully priced in, with less than 10% odds of a larger 50 bp move.  Another 25 bp hike March 22 is almost priced in, while one last 25 bp hike in the second quarter, Q2, is only about 30% priced in

However, analysts at ANZ Bank recently wrote a note, entitled, ''Fed tightening not done yet.''

''So far in early 2023, US data releases have indicated a mild easing in inflationary pressures and softer demand. This indicates the Fed’s aggressive tightening last year is starting to take effect,'' the analysts explained. ''Weakness in housing is evident (existing home sales fell 17.8% last year), manufacturing activity has faltered and Retail Sales are returning to trend.''

''This is exactly what the Fed wants as it tries to steer inflation sustainably back to target. But it is early days, and the Fed will not declare victory on inflation yet,'' the analysts reminded its readership.

''However, the Federal Open Market Committee is entering a more nuanced phase of the tightening cycle. The lagged effects of last year’s policy tightening still have further to bite, and so far, there is no widespread evidence that the labour market is weakening significantly''

''High visibility layoffs at some major tech and financial firms are grabbing the headlines, but the layoffs are global and US initial claims data are not indicating that labour demand is weakening. We think the Fed will continue to emphasise the tightness of the labour market in its deliberations and err towards further tightening. We expect a 25bp rate hike at the next meeting and guidance that rates will need to rise further.''

Meanwhile, analysts at Brown Brothers Harriman have also of the opinion that the market is underestimating the potential for a higher for longer Federal Reserve. ''Core Personal Consumption Expenditures, PCE, has largely been in a 4.5-5.5% range since November 2021,'' they said. ''We think the Fed needs to see further improvement before even contemplating any sort of pivot.''

So, when we weigh up the prospects of a rethink along the curve and compare this to the recent price action and historic structures, as well as the timeline support/resistance areas, it would be reasonable to assume a corrective bias and start to plan for such as a tradable opportunity, as illustrate don the charts below. 

Gold Price technical analysis

In the start of the week's pre-open analysis, Gold, Chart of the Week: XAU/USD trapping longs for a significant squeeze ahead of key red-hot events, it was noted that ''the Gold price rallied beyond the June 2022  and November 2021 highs triggering breakout traders, and those with wide stops remain in the money all the way into the old price imbalance (OPI).''

Gold price weekly chart

It went on to show that the Gold price ''major resistance (MR) could now be in play as per the weekly Doji left in last week's close. The Gold price 38.2% Fibonacci retracement level around $1,878 could be an attractive area for a pullback that coincides with the price imbalance (PI) below as well as a reasonable area for where stops are placed that have been trailed higher by those targeting the breakout above the $1,870s.''

Looking ahead, the Gold price bears need to below the current trendline support. Gold price major support (MS) is near $1,820 and $1,770. This meets the Gold price's 78.6% Fibonacci retracement. 

If all of this were to play out over the coming weeks, the prior break of the Gold price structure, (BoS), around $1,670 could come back under pressure that guards against major downside correction in the Gold price.  

Gold price H1 chart

Meanwhile, as for the current market action in Gold price, the pre-market analysis noted the prospects of a move higher for the initial balance of the week within a phase of consolidation as follows: