Gold Prices Forecast: Fed’s Stance, Dollar Strength Impacting XAU/USD

James Hyerczyk
Published: May 28, 2024, 10:33 GMT+00:00

Key Points:

  • Gold prices drop as traders anticipate U.S. inflation data, affecting Fed decisions.
  • Fed maintains current rates but signals readiness for further hikes.
  • Core PCE data expected to show slight improvement, possibly opening rate cut discussions.
Gold Prices Forecast

In this article:

Gold Prices Dip Ahead of U.S. Inflation Data

Gold prices slipped on Tuesday as traders awaited key U.S. inflation data that could influence the Federal Reserve’s next move on interest rates. Despite this dip, there are mixed signals about the direction of spot gold in the short term.

At 10:02 GMT, XAU/USD is trading $2344.08, down $7.295 or -0.31%.

Dollar Strength and Fed’s Stance

A strong dollar, bolstered by a potential shift in the Fed’s monetary policy towards interest rate hikes, poses a significant risk to gold prices. The Federal Reserve’s recent minutes indicate that the central bank is in a holding pattern, maintaining current interest rates while closely monitoring inflation data. The minutes revealed concerns over high inflation reports from earlier this year, suggesting a possibility of further rate hikes if inflation does not ease as expected.

Core PCE and Market Expectations

The upcoming release of the core personal consumption expenditures (PCE) price index, the Fed’s preferred inflation measure, is highly anticipated. Economists expect a slight improvement in core inflation, with a forecast of 0.2% for April, down from 0.3% in March. Consumer spending is also expected to moderate, which could signal a cooling economy. This data could keep the door open for potential rate cuts later in the year, depending on how inflation trends in the coming months.

Fed’s Inflation Battle

The Fed’s minutes showed that while officials are hopeful inflation will return to the 2% target, they are prepared to tighten policy further if necessary. The debate within the Fed reflects uncertainty about how effective current interest rates are in curbing inflation. Some Fed officials believe the high inflation seen earlier this year may be temporary, but the data in the next few months will be crucial in determining the Fed’s course of action.

Market Sentiment

Traders are pricing in a roughly 63% chance of a rate cut by November, according to the CME FedWatch Tool. However, some Fed officials have dampened expectations for imminent rate cuts, suggesting a more prolonged period of higher interest rates. This cautious stance has led to a pullback in bets on multiple rate cuts this year.

Market Forecast

In the short term, gold prices are likely to remain volatile as traders react to incoming inflation data and Fed policy signals. The mixed outlook from the Fed minutes and market expectations suggests a cautiously bullish stance on gold, contingent on upcoming economic indicators confirming a moderation in inflation. If inflation shows signs of easing, the likelihood of rate cuts could increase, supporting a more positive outlook for gold prices in the latter part of the year.

Technical Analysis

Daily Gold (XAU/USD)

XAU/USD appears to be trying to form a secondary higher support base between $2325.465 to 2358.565. More importantly, it’s still holding above the key 50-day moving average at $2313.462. This is controlling the intermediate trend.

If the 50-day moving average fails as support then look for the selling to possibly extend into the short-term bottom at $2277.34.

On the upside, the first target is a minor pivot at $2387.80.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

Did you find this article useful?