Gold Prices Forecast: Fed Rate Expectations Drive XAU/USD’s Short-Term Outlook

Highlights

• U.S. inflation data hints at Fed rate pause, but gold retreats.
• Uncertainty surrounds the Fed’s rate trajectory for 2024
• XAU/USD facing short-term downward pressure. 

Overview

Gold (XAU/USD) is edging lower on Thursday, trading at $1909.11, down $0.185 or -0.01% at 05:47 GMT. The yellow metal’s value retreated from an earlier peak of $1912.97. This pullback comes despite the U.S. dollar and 10-year Treasury yields weakening, following the release of U.S. inflation data that reinforced expectations of a Federal Reserve rate pause next week.

Supply and Demand Factors

The dip in gold prices follows a mixed report from the Labor Department, where underlying inflation’s annual rise was the smallest in nearly two years, suggesting a Fed rate pause. However, August saw the highest increase in U.S. consumer prices in 14 months, mainly due to surging gasoline costs. The uncertainty lies in the Fed’s rate trajectory for 2024, a key factor contributing to gold’s current volatility.

Market Sentiment

The SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, reported a 0.3% decline in holdings, standing at 882.00 tonnes on Wednesday, signaling waning demand for the precious metal.

Impact of a Stronger Dollar

The stronger U.S. dollar, bolstered by the inflation data, made gold relatively more expensive for investors holding other currencies. While the CPI data largely aligned with expectations, it suggested that the Federal Open Market Committee (FOMC) is likely to keep rates steady, providing a temporary support level for gold.

Fed Rate Expectations and Precious Metal Concerns

Market expectations for the Fed to maintain interest rates at the upcoming meeting have strengthened, with a 60% likelihood of a pause in November as well, according to the CME FedWatch tool. Higher interest rates tend to boost yields on competing U.S. Treasury bonds, drawing investors away from non-interest-bearing assets like gold. As a result, precious metal investors are less concerned about inflation and more focused on the opportunity costs associated with holding gold in a rising rate environment.

Short-Term Forecast

Investors are now awaiting U.S. August producer prices and retail sales data, along with the European Central Bank’s rate hike decision, ahead of the Fed’s policy decision on September 20. In this environment, gold prices face downward pressure as the dollar gains strength, and the possibility of a Fed rate pause looms large.

Technical Analysis

Spot Gold (XAU/USD) stands at $1908.17, dipping slightly from $1909.51 without much deviation from the 200-4H moving average at $1922.28. However, it’s noticeably below the 50-4H moving average at $1922.64, reflecting bearish sentiment. The 14-4H RSI at 35.56 indicates weakening momentum but avoids extreme oversold conditions.

Major support lies between $1885.79 and $1893.70, while resistance ranges from $1946.99 to $1954.88. Presently, market sentiment leans bearish as gold grapples with resistance levels and remains below the 50-4H moving average, suggesting potential downward pressure.

With the 50-4H in a position to cross to the bearish side of the 200-4H moving averages, short-term weakness should prevail.