Gold Price Forecast: XAU Prices Slide on Hawkish Fed Remarks, Strong Dollar

Highlights

• Gold prices affected by stronger dollar and hawkish Fed remarks.
• Traders cautious amid uncertainty about interest rate direction.
• XAU fluctuates within a range, dampened by stock market rise and Fed’s hawkish stance.

Overview

Gold prices faced downward pressure in light trade on Monday, primarily due to a stronger dollar. Investors were closely evaluating the potential direction of interest rates following hawkish remarks from U.S. Federal Reserve policymakers. In their first comments since the central bank’s recent decision to keep the policy interest rate unchanged, Fed officials maintained a hawkish tone. This, combined with a firm dollar index, diminished the attractiveness of gold for buyers holding other currencies.

At 06:00 GMT, Gold (XAU) is trading $1955.48, down $1.75 or -0.09%.

XAU Volatile as Traders Anticipate Rate Hike

Last week, bullion experienced a modest decline as traders increased their bets on a rate hike in July following the Fed’s pause after a series of consecutive hikes. On Friday, gold prices exhibited volatility as investors grappled with the hawkish outlook on interest rates from the Federal Reserve, which counteracted the support provided by the dollar’s overall retreat during the week. Consequently, gold fluctuated between positive and negative territory.

Rangebound Amid Hawkish Fed, Stock Market Rise

Throughout June, gold has predominantly traded within the range of $1,936 and $2,000. With no evident catalyst on the horizon, traders have shown a preference for trading within this range without fully committing to a breakout. However, the continued rise of stock markets and the persistent hawkish stance of the Fed have dampened the demand for safe-haven assets like gold.

Gold Supported by Weak Dollar

Conversely, there are some factors that offer support to gold. Weakening employment figures and the relative strength of foreign currencies against the U.S. dollar provide tailwinds for the precious metal. Furthermore, although the dollar index saw a slight increase on Friday, it was on track for its worst week in five months, which makes gold more affordable for overseas buyers.

Inflation Expectations Dip

Traders also took note of the University of Michigan’s survey, which indicated that near-term inflation expectations among U.S. consumers reached a more than two-year low in June, while the outlook for the next five years showed slight improvement. While gold is typically considered a hedge against inflation, the opportunity cost of holding non-yielding bullion rises with interest rate hikes.

End of Fed Tightening Cycle Support?

Despite the current challenges, historical trends suggest that gold prices can outperform towards the end of a Fed tightening cycle. Although the opportunity cost of holding gold has increased, it is anticipated that real yields will gradually decrease, providing potential support for gold prices.

Fed Chair Powell Could Set this Week’s Tone

Looking ahead, investors eagerly anticipate Fed Chair Jerome Powell’s congressional testimonies scheduled for Wednesday and Thursday, as they seek further guidance on future interest rates. These testimonies could provide crucial insights into the market’s direction in the short term.

Technical Analysis

Gold (XAU) is trading on the bearish side of $1992.24 (PIVOT) on Monday, putting it in a weak position. The selling pressure is also bringing it closer to $1917.41 (S1). The market is also trading on the strong side of $1917.41 (S1), which is giving the market a slight upside bias.

The mid-point of the $1992.24 – $1917.41 trading range is $1954.83.

The market is currently straddling the mid-point, which indicates momentum is neutral as traders await a catalyst to drive it in either direction.

While the weaker U.S. Dollar has been supportive, fear of a Fed rate hike in July is capping any gains.