Gold Price Forecast: XAU/USD holds steady around $1,940 as the Fed policy decision approaches

• XAU/USD retraces from $2,000 as US Treasury bond yield surges on Fed’s backstop.
• Gold prices poised for potential volatility amid upcoming Fed meeting.
• Gold price could fall further if the dot plot remains stretched. 

XAU/USD will likely remain within a narrow range as the market eagerly awaits the Federal Reserve (Fed) rate decision. Gold prices experienced a sharp retracement after reaching the $2,000 mark on Monday, with the decline occurring due to rising US Treasury bond yields.

Gold prices surged to the $2,000 level amid global banking turmoil, prompting investors to flock to US Treasury bonds and causing yields to fall. The precious metal rallied as much as 10%, or about $180, reaching a one-year high as safe-haven demand increased following the collapse of U.S.-based Silicon Valley Bank and a crisis at lender Credit Suisse.

The banking crisis took a turn when US authorities intervened, injecting dollar liquidity into the market. The Fed initially restarted swap lines for needy central banks and opened a discount window for struggling commercial banks. Later, US Treasury Secretary Janet Yellen assured deposit guarantees for all small banks.

These developments somewhat eased investor concerns, leading to increased risk exposure and a positive close for Wall Street on Tuesday.

This has further encouraged investors to consider the possibility of an additional 25 basis point (bps) rate hike from the Fed. As the Fed meeting approaches, monitoring the dot plot and forward guidance will be crucial. A higher dot plot could reinforce investor expectations of a hawkish repricing, putting further pressure on gold prices.

Traders are advised to exercise extra caution, as this event could lead to various interpretations of policy statements due to the wide polarization among investors. Not all Fed events are identical; some offer clearer price action, while others result in choppy trading. Fed Chair Jerome Powell's press conference may provide more clarity for investors.

Levels to watch