Gold Price Forecast: XAU Prices Decline on U.S. Dollar’s Recovery Amid Rate Hike Speculation

Highlights

• U.S. dollar’s recovery weighs on gold prices
• Gold becomes relatively more expensive for non-dollar buyers
• Fed’s rate outlook affects non-yielding bullion’s appeal

Overview

The U.S. dollar’s recovery is weighing on gold (XAU) prices on Wednesday, as market participants assessed the likelihood of the Federal Reserve increasing interest rates in May, then pausing. Additionally, the US Dollar Index rose by 0.1%, causing gold to become relatively more expensive for buyers holding other currencies.

At 08:00 GMT, Gold (XAU) is trading $1992.30, down $13.52 or -0.67%.

Gold Prices May Decline Despite Expectations of Rate Hike Pause by Fed

The market has already factored in a 25 basis-point increase, with the attention now on whether the Federal Reserve will indicate a pause in rates afterward. Although this could support gold prices, the market’s recent surge and overextended technical conditions mean that there’s still a chance of a price decline if the Fed’s rate outlook is confirmed. According to the CME FedWatch tool, there’s an 84.6% likelihood of a 25 basis-point hike in May, with expectations of rate cuts in the latter part of the year. Higher interest rates dim non-yielding bullion’s appeal.

Bullard and Bostic Hold Different Views on Fed Rate Hike Policy

Investors are monitoring comments from Fed officials this week as they try to gauge whether the May rate hike will be the last before the Fed takes a break. Although the market expects a 25 bps hike in May, the uncertainty surrounding the possibility of rate cuts this year is causing volatility in the U.S. bond market. The bond market volatility is driving the dollar, not the other way around.

Technical Analysis

From a daily technical viewpoint, Gold (XAU) is trading above the pivot at $1927.36, but heading lower after failing to overcome resistance.  Overtaking $2045.30 will be a sign of strength that could extend the rally into $2121.30.  Meanwhile, a break under $2045.30 will indicate the presence of sellers. This could create the downside momentum needed to challenge the pivot at $1927.37.

For a look at all of today’s economic events, check out our economic calendar.