Gold Price Forecast: Uncertainties Surrounding Fed’s Policy Impact XAU Prices

Highlights

• Gold prices influenced by Fed’s policy outlook and economic data.
• Dollar’s softening provides some support for XAU.
• Traders closely watching Fed’s meeting and May CPI report.

Overview

Gold (XAU) prices are facing downward pressure as investors seek clarity on the U.S. Federal Reserve’s policy outlook. However, the softer U.S. Dollar is providing some support and preventing further declines, resulting in gold trading within a narrow range.

Gold Benefits from Dollar Easing

The dollar index has slightly eased, making gold more affordable for investors holding other currencies. Additionally, the yield on 10-year Treasuries has fallen following weaker-than-expected U.S. services sector data released on Monday. Investors are carefully analyzing key economic data and assessing the path of interest rates, which could impact the Federal Reserve’s future policy decisions.

Market Assesses Fed’s Rate Pause Possibility

At present, the 2-year Treasury yield is trading lower by 3 basis points at 4.472%, while the yield on the 10-year Treasury remains flat at 3.689%. Market participants are evaluating the possibility of the Federal Reserve pausing its rate-hiking campaign during its upcoming meeting, as recent economic data has raised concerns about the effectiveness of previous rate increases. The uncertainty surrounding the Fed’s next moves is further compounded by May’s jobs report, which showed payrolls exceeding economists’ expectations.

Fluctuating Rate Expectations

Given the Fed’s data-dependent stance, rate expectations are expected to experience significant fluctuations in response to incoming economic data. Traders are closely watching the U.S. May CPI report as a key indicator for future rate decisions. The Institute for Supply Management’s survey revealed that the U.S. services sector barely grew in May, with new orders slowing and prices paid by businesses for inputs reaching a three-year low. This could support the Fed’s efforts to combat inflation. Lower interest rates typically boost gold prices as they reduce the opportunity cost of holding the non-yielding asset.

Challenges for Gold Traders

However, the ever-changing narrative surrounding the magnitude and timing of rate cuts could pose challenges to gold prices in the short term. Until there is greater clarity on this front, it is unlikely that investors will aggressively push gold above $1992.24. A major shift in Fed policy expectations, potentially influenced by next week’s CPI data, could change this scenario.

Traders Gauge Fed While Eyeing Value Level

Traders have currently priced in a 76% chance that the Fed will maintain interest rates at its upcoming policy meeting on June 13-14, according to CME Group’s FedWatch tool. In terms of technical analysis, gold (XAU) may retest a support level at $1,917.41 per ounce. If investors perceive value in gold amid a high interest rate environment, a strong technical bounce could be observed.

Short-Term Outlook:  Neutral Until CPI Data

In conclusion, gold prices are currently being influenced by uncertainties surrounding the Fed’s policy outlook and the potential impact of economic data. The market is eagerly awaiting the Fed’s meeting and the release of the U.S. May CPI report for further guidance on future rate decisions. Until greater clarity is provided, gold’s upside potential may be limited, and investors will monitor key levels and data for potential opportunities.

Technical Analysis

Gold (XAU) is trading on the bearish side of $1992.24 (PIVOT), putting it in a weak position. This level is also the nearest resistance and a potential trigger point for an acceleration to the upside.

A sustained move under $1992.24 (PIVOT) will indicate the selling pressure is getting stronger. If this creates enough downside momentum then look for the selling to possibly extend into $1917.41 (S1).

A sustained move over the $1992.24 (PIVOT) will signal the return of strong counter-trend buyers. If this creates enough near-term momentum then look for a surge into the $2052.37 (R1).

The mid-point of the PIVOT and S1 is $1954.83. Trading at or near the mid-point reaffirms the downtrend, but also indicates that momentum may be getting ready to shift to the upside.