Gold Price Forecast: Obstacles Ahead as Fed’s Stance on Inflation Holds Firm

Highlights

• Limited movement in gold prices as traders assess economic data and Fed signals.
• Gold faces challenges due to Fed’s stance on inflation and interest rates.
• Dollar dynamics and rising rates influence gold’s performance in the market.

Overview

Gold (XAU) exhibited limited movement on Friday as traders carefully assessed recent U.S. economic data and the hawkish signals emanating from the Federal Reserve. The market experienced a slight downward drift after relinquishing earlier gains. Nonetheless, a relatively softer dollar offered some support to the precious metal.

Gold Struggles Amid Fed’s Rate-Hike Anticipation

In a noteworthy turnaround, bullion rebounded from a three-month low on Thursday following encouraging U.S. economic data that provided a brief respite from the Fed’s “hawkish pause” on interest rate hikes. However, gold is currently facing obstacles in its quest to climb higher due to the Fed’s steadfast stance on inflation and interest rates. The central bank’s unwavering tone is reducing the allure of gold for investors, as the anticipation of future interest rate increases looms on the horizon.

Gold’s Safe-Haven Status Challenged

Although gold is traditionally regarded as a safe haven during times of economic uncertainty, the appeal of zero-yield bullion is dampened by higher interest rates. Consequently, the conflicting dynamics of a safe haven asset and rising borrowing costs are impacting gold’s performance in the market.

Traders Pricing July Fed Rate Hike

Traders are now factoring in a 72% likelihood of a 25-basis point rate hike in July, as indicated by the Fed’s latest projections. The central bank hinted that borrowing costs may need to rise by up to half a percentage point by the end of the year. As this expectation takes hold, gold’s pricing dynamics are influenced, particularly by the strength of the U.S. dollar.

Mirroring US Dollar Index Movement

The dollar index is currently hovering near a one-month low, effectively lowering the cost of gold for buyers who hold currencies other than the dollar. This factor mitigates the impact of the Fed’s hawkish signals on the gold market.

Rangebound Trade Expected

Looking ahead, gold is anticipated to trade within a range of $1,917.41 to $1,992.24 over the next two weeks, with notable resistance anticipated at the upper end. However, caution should be exercised if the support level at $1,917.41 is breached, as it may trigger a downward shift in prices.

In the backdrop of gold’s performance, the Bank of Japan has decided to maintain its ultra-easy monetary policy despite stronger-than-expected inflation. The central bank remains focused on supporting a fragile economic recovery amidst a significant slowdown in global growth.

Short-Term Forecast:  Bearish Tone

Overall, gold prices continue to navigate a complex landscape influenced by economic data, the Fed’s signals, and global factors. Traders and investors will closely monitor developments to gauge the trajectory of this precious metal in the near term.

Technical Analysis

Gold (XAU) is trading on the bearish side of $1992.24 (PIVOT) on Friday, putting it in a weak position. The selling pressure is also bringing it closer to $1917.41 (S1).

Longer-term, the sustained move under $1992.24 (PIVOT) indicates the market is still in the hands of strong sellers.

Overtaking the $1992.24 (PIVOT) will signal the return of buyers. If this creates enough near-term momentum then look for a surge into the $2052.37 (R1).

At this time, the bias is clearly to the downside, but the market remains vulnerable to a potentially bullish closing price reversal bottom. So watch for a technical bounce on the first test of $1917.41.