Gold Price Forecast: Hawkish Fed Stance Dampens XAU Appeal, Bearish Outlook Persists

Highlights

• Gold prices decline due to a stronger U.S. Dollar.
• Optimism surrounding U.S. debt ceiling deal affects gold appeal.
• Hawkish Fed stance reduces attractiveness of gold as an investment.

Overview

Gold (XAU) is drifting lower on Tuesday. The move is being fueled by a stronger U.S. Dollar. Losses are being limited, however, by a dip in Treasury yields.

At 05:13 GMT, Gold (XAU) is trading $1937.01, down $4.615 or -0.24%. Last Friday, the SPDR Gold Shares ETF (GLD) settled at $180.90, up $0.70 or +0.39%.

Gold prices traded in a narrow range on Tuesday, hovering close to a recent two-month low. The metal’s appeal was dented by optimism over a U.S. debt ceiling deal and reduced expectations for a pause in the Federal Reserve’s rate hike policy in June.

Debt Ceiling Deal Dims Gold Demand

On Monday, U.S. President Joe Biden expressed confidence in the prospects of Congress passing the debt ceiling deal he reached with House of Representatives Speaker Kevin McCarthy. This development, along with the diminishing concerns over events like the U.S. regional banking crisis and the U.S. debt ceiling raise, has reduced market interest in gold as investors seek higher returns.

Hawkish Fed Stance Weighs

However, Fed officials have taken a hawkish stance on interest rates in recent days. This has somewhat offset the safe-haven flows related to the U.S. debt ceiling situation, as higher interest rates diminish the appeal of zero-yield bullion. Neel Kashkari, Minneapolis Fed President, who experienced the 2008 financial crisis, now expresses worries about systemic risks and inflation as a U.S. monetary policymaker.

Bullish Equities Reduce Gold’s Attraction

If a more dovish approach is adopted later in the year, it would imply a potential easing of interest rates. Such a move would be seen as bullish for equities and reduce the attractiveness of holding gold compared to other riskier asset classes.

Currently, the markets are pricing in a 42.7% chance of the Federal Reserve keeping rates unchanged in June.

Short-Term Outlook:  Bearish

The notes suggest a bearish outlook for gold. Factors such as optimism over a U.S. debt ceiling deal, reduced expectations for a pause in the Federal Reserve’s rate hike policy, and the hawkish stance of Fed officials on interest rates have all diminished the appeal of gold. Additionally, if a more dovish approach is taken later in the year, it could further reduce the desire for investors to hold gold. Therefore, the overall sentiment leans towards a bearish outlook for the gold market.

Technical Analysis

Gold (XAU) is trading on the bearish side of $1956.30 (S1), putting it in a weak position.

A sustained move under $1956.30 (S1), however, could extend the selling into $1923.06 (S2). Aggressive counter-trend buyers could come in on the first test of this level, but if it fails, then look for the selling to possibly lead to a near-term test at $1876.81 (S3).

Overcoming $1956.30 (S1) will indicate the counter-trend buying is getting stronger. If this creates enough near-term momentum then look for a surge into the PIVOT at $2002.54.

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