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Gold Prices Brace for the Federal Reserve, Will Chair Jerome Powell Damage XAU/USD?

Gold Prices Brace for the Federal Reserve, Will Chair Jerome Powell Damage XAU/USD?

Daniel Dubrovsky, Contributing Senior Strategist


Gold, XAU/USD, Federal Reserve, Technical Analysis - Briefing:

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Gold prices fell over the past 24 hours as traders positioned themselves ahead of Wednesday’s Federal Reserve interest rate announcement. There was a rally in the haven-linked US Dollar which occurred as the S&P 500 fell 1.13%. This pressured anti-fiat gold, which has generally been faring poorly considering rising global government bond yields.

XAU/USD has no inherent yield for traders holding onto the precious metal. It is also widely priced in US Dollars around the world. As such, when the return on cash rises (via interest rates), this tends to bode ill for gold. This is also why the Fed monetary policy announcement is likely going to carry with it major implications for the yellow metal.

What are the expectations? Last week’s surprisingly strong US CPI report boosted the odds of a 100-basis point rate hike. But, the likely base case scenario is a 75-bps delivery. This does mean that if the central bank gives the latter, it could bolster risk appetite. That may hurt the US Dollar and offer gold a slight boost at the onset. However, all eyes will then shift to Chair Jerome Powell’s press conference.

This is where things will probably get the most interesting. Economists and traders have been gradually boosting recession probabilities due to tightening credit conditions. Could this cause Fed policymakers to hold back? A slight increase in bets that this could occur might boost gold. But, the labor market remains tight. That risks keeping core inflation sticky, which is not a good position for the central bank. As such, while there might be room for a push higher in gold ahead, the broader trend could remain tilted lower.

Gold Technical Analysis

Gold returned to the familiar area of support just above the 78.6% Fibonacci extension, which is sitting at 1651. Prices remain under the 2021 low. Positive RSI divergence is brewing, showing that downside momentum is fading. If this precedes a turn higher, keep a close eye on the 20-day Simple Moving Average (SMA). The latter could hold as resistance, maintaining the downside focus.

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XAU/USD Daily Chart

XAU/USD Daily Chart

Chart Created Using TradingView

--- Written by Daniel Dubrovsky, Strategist for

To contact Daniel, use the comments section below or@ddubrovskyFXon Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.