Gold (XAU/USD) & Silver Price Forecast: Fed Hike Odds Surge Ahead of Rate Decision

Gold & Silver Outlook: Fed Hike Odds Surge as Middle East Supply Shock Fuels Inflation Risk

Gold and silver begin this week in the grip of monetary policy pressure after strong U.S. inflation and disruptions in the energy markets sparked market expectations for an additional rate hike by the Federal Reserve.

Market expectations now sit at around a 86.5% likelihood of an increase by 25 basis points, up from around 67% after last week’s inflation data was released. Prices of goods and services consumed by American households increased in August, while core inflation registered its biggest monthly increase in the last four months. As anticipated, Goldman Sachs has modified its position and is now expecting an increase, while J.P. Morgan is also anticipating increases in September and December.

Higher interest rate expectations also rise the cost of gold, as they increase the cost of opportunity by increasing bond yields along with other non-yielding assets. The Federal Reserve’s meeting is scheduled for Wednesday, and while market participants are interested in the decision,Warsh’s press conference and new rate projections will attract just as much interest.

Geopolitics will provide the counterweight. Over the weekend, the disruption of Saudi Arabia’s East-West pipeline by drone attacks poses a risk to supply in the Middle East. The Houthi’s have been continuously disrupting trade through Bab el-Mandeb and, along with Iran, have been disrupting trade through the Strait of Hormuz, creating an energy supply disruption. Although the disruptions will positively support the gold market due to the energy price crisis, inflation expectations will continue to increase, prompting tighter monetary policies, to be longer and more aggressive.

Like gold, the pressure on silver to yield also exists. Industrial exposure makes silver even more susceptible than gold to rising borrowing costs and energy prices should they impact global manufacturing demand. Reuters documented silver’s move lower Monday with investors positioning for this week’s Fed decision.

Fundamental bias: Neutral to bearish for gold ahead of the Fed, neutral to bearish for silver with policy guidance on Wednesday being the key element.

Gold Technical Analysis: XAU/USD Stays Below $4,355 as $4,312 Support Comes Into Focus

For the 1-hour charts, gold is presently trading at the $4,328 level. What is of interest to me is that price is trending below the declining trendline as both the moving averages are trending lower. The latest rebound has been unsuccessful in clearing the $4,355 resistance zone, and as such, the short-term trend remains bearish.

The first support level that stands out is the $4,312 level, which if breached would expose the $4,283 and $4,253 levels in that order. For the upside, should the buyers gain control, $4,355 would be the first major resistance level. In the event of a stronger recovery, $4,402 and $4,434 would come into play, and would possibly begin to alter the overall declining trendline.

RSI is showing signs of weakness as the level is below the midline and as such I am maintaining my bearish outlook on gold while price is below $4,355 and the declining trendline. A sustained hourly close above $4,402 would alter my outlook, while a break below $4,312 would justify a move toward $4,283.

Silver Technical Analysis: XAG/USD Holds $63.01 Support as $64.48 Resistance Limits Recovery

Silver is currently trading around $63.85 on the 1-hour chart. After the latest move to the $63.01 support region, price is still below both moving averages and the trendline. Because of this, the move is still corrective until the level of $64.48 is reclaimed.

Both moving averages are declining and price is still trading below this level as well. In addition, price is still trading below the broader declining trendline.

Should the buyers gain control above $64.48, then the level of $64.02 would come into play. Should this level be cleared, then the level of $64.34 would come into play.

The first level of resistance at $64.48 would need to be breached for me to consider $65.29, $66.20 and $67.12 as possible targets. If it does though, support in the $63.01 region is now key, with $61.95 and $61.08 also coming in to play as potential support if sellers take us lower.

With RSI still trending below midline after it recovered from oversold conditions, I will continue to trade with a cautious bias until it corrects itself. For now, I’m leaning bearish on silver unless it trades above the $64.48-$65.29 range. If silver manages to break above $65.29 in the hourly chart, my bearish bias would be invalidated. Until then, a break below $63.01 would also be considered a strong bearish signal.