Gold Price Forecast: XAU Prices Slide to 3-Month Low Amid Fed’s Rate Hike Hints

Highlights

• Gold prices decline as the U.S. dollar strengthens and Fed hints at rate hikes.
• Traders anticipate two rate increases this year, impacting gold prices.
• Seasonally slow period for physical demand may contribute to a downward trend for gold.

Overview

Gold (XAU) prices are edging lower on Thursday. They have reached a nearly three-month low. This decline is driven by a strengthening dollar. The strengthening dollar is a result of hints from the U.S. Federal Reserve about potential interest rate hikes.

The Fed’s latest economic projections indicate that an unexpectedly robust economy and a slower decline in inflation may lead to a half-a-percentage-point increase in borrowing costs by year-end. With the prospect of two more rate increases on the horizon, gold prices are facing selling pressure, and the next support level is anticipated around $1,917.41.

Pressured by Higher Treasury Yields

The Federal Reserve’s decision not to raise rates immediately but to project future increases has provided the market with a sense of direction after gold prices stabilized within a specific range for weeks. While the announcement led to fluctuations in Treasury yields, the 2-year yield increased marginally by less than 1 basis point to 4.705%. However, the 10-year yield dropped more significantly by over 4 basis points to 3.8%.

Rising Dollar Weighs on Foreign Demand

As yields rise, gold prices tend to face downward pressure due to their non-yielding nature. Additionally, the U.S. dollar index climbed alongside the increase in yields, making gold more expensive for holders of other currencies. The Fed plans to assess the impact of its previous 10 rate hikes before its next meeting, scheduled for July 25-26.

Seasonally Lower Demand for Physical Gold

Traders are now factoring in a roughly 72% probability of a Fed rate hike in July, according to the CME Fedwatch tool. Furthermore, with a seasonally slow period for physical demand approaching, gold prices are expected to gradually decline in the coming sessions, unless there is a notable slowdown in U.S. economic data that sparks renewed interest in the gold market.

Hawkish ECB Could Fuel Selling Pressure

Investors will keep a close eye on various U.S. economic data releases throughout the day, particularly the weekly jobless claims at 12:30 GMT, for further insights. Additionally, attention remains focused on the European Central Bank (ECB) meeting, where expectations are high for borrowing costs to reach their highest level in 22 years, as part of the bank’s ongoing battle against inflation, despite concerns about the euro zone’s economic performance.

Short-Term Outlook:  Bearish on Rate Hike Expectations

In summary, gold (XAU) prices are facing a number of bearish factors as the U.S. dollar strengthened and the Federal Reserve hinted at future rate hikes. The market responded negatively to the Fed’s projections, which paved the way for two potential rate increases later this year. This development, coupled with rising Treasury yields, contributed to the drop in gold prices.

While traders anticipate a July rate hike, the seasonally slow period for physical demand suggests a downward trend for gold prices, barring a significant slowdown in U.S. economic data. The focus today will be on the European Central Bank and its efforts to combat inflation, even as concerns about the euro zone economy persist.

Technical Analysis

Gold (XAU) is trading on the bearish side of $1992.24 (PIVOT) on Thursday, 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.