Gold Prices Rise, but Fed Chair Powell Will Likely Keep Life Difficult for XAU/USD

Gold, XAU/USD, Fed – Market Update:

• Gold prices take a shot towards the upside ahead of the Fed
• Jerome Powel may keep making life difficult for XAU/USD
• What are key levels to watch heading into another rate hike?

Gold prices rallied over the past 24 hours heading into Wednesday’s highly anticipated FOMC rate decision. Chairman Jerome Powell and company are widely expected to raise benchmark lending rates to a zone of 5.25% - 5.50% following a pause at the previous meeting. This has been amidst US economic resilience to this monetary tightening cycle.

According to the Citi Economic Surprise Index tracking the United States, the gauge sits at 70.30. That is around highs from April 2022. The more positive the reading is, the more that means economic data has generally been outperforming expectations and vice versa. In fact, the index bottomed in the summer of 2022 when it was deeply negative. Since then, it has been steadily rising.

Meanwhile, even though headline inflation has eased without causing a surge in unemployment, core CPI readings remain sticky. These exclude volatile components, such as food and energy prices. As such, the Fed is likely to keep the door open to further tightening if necessary as it is likely too early to conclude that the fight against inflation is over.

This will likely continue pouring cold water on expectations of a pivot, which surged after Silicon Valley Bank collapsed in March. But, thus far, the economy has for the most part remained unscathed. There is a weak consensus of a further hike to 5.50% - 5.75% by year-end. More importantly, financial markets have essentially fully priced out cuts this year.

What does this mean for gold heading into the Fed? Well, reluctance from the central bank to hint at easing and instead, focus on keeping policy tight should uphold Treasury yields. For non-yield-bearing gold, that would make its life difficult. XAU/USD remains at the same level as it was in July 2020. So much for it being an inflation hedge.

Gold Technical Analysis

On the daily chart, XAU/USD remains above the near-term falling trendline from May. Gold found fresh resistance at the 23.6% Fibonacci retracement level of 1971. Meanwhile, immediate support is the 50-day Moving Average (MA). Breaking lower would place the focus on the 38.2% level at 1903. Otherwise, extending higher places the focus back on the 2048 – 2081 resistance zone.

XAU/USD Daily Chart

Chart Created in TradingView

--- Written by Daniel Dubrovsky, Senior Strategist for DailyFX.com