Gold Price Forecast: XAU Steady Amid Weaker Dollar, Fed Rate Decision Looms

Highlights

• Gold prices steady with support from weaker dollar.
• Fed’s rate decision may impact gold prices.
• Supply chain easing affects global inflation and central bank policies.

Overview

Gold (XAU) prices traded within a narrow range on Wednesday, finding support from a weaker dollar despite concerns surrounding the upcoming U.S. Federal Reserve’s interest rate decision. The slight weakening of the dollar index made gold relatively cheaper for buyers holding other currencies, maintaining the upward trend in the precious metal’s value. The key question now is when the Fed will end its rate-hike campaign, as increased clarity on this matter could drive gold prices even higher.

Gold at Risk with Hawkish Fed

However, there is a risk for gold if the Federal Reserve adopts a more hawkish stance due to durable inflation and other factors. Non-interest-bearing bullion tends to lose its appeal in a high-interest-rate environment, potentially impacting gold prices negatively. The outcome of the Fed’s decision will heavily influence the market sentiment towards gold.

Supply Chain Pressures Ease

In terms of supply and demand dynamics, the New York Fed reported that supply chain pressures continued to ease in May. This reduction in pressures has been one of the driving forces behind global inflation. The latest Global Supply Chain Pressure Index from the New York Fed stood at -1.71, indicating below-average supply chain pressures worldwide. Contributions from Great Britain backlogs and Taiwan delivery times were diminished, alleviating supply chain pressures. However, euro area delivery times and backlogs put upward pressure on the index.

The decline in supply chain pressures has been ongoing since December 2021, when the index reached its peak at 4.31. The resolution of supply chain disruptions caused by the pandemic has contributed to this downward trend. As supply chain pressures ease, inflationary forces diminish, prompting central banks like the Federal Reserve to reconsider their aggressive rate increases aimed at controlling inflation.

Inflation Eases, Fed Rate Pause?

With inflation pressures easing in recent months, the possibility of the Fed pausing its rate rises has emerged. However, demand factors still contribute to higher underlying inflation pressures, which may prevent the tightening campaign from coming to a close. The upcoming U.S. consumer price report for May, scheduled for release on June 13, will provide further insights into the health of the world’s largest economy. Investors eagerly await this data alongside the dovish remarks from Fed officials, as it will shape expectations ahead of the Fed’s policy meeting.

FedWatch Tool:  June Pause, July Rate Hike

Market indicators show an 80.6% likelihood of Fed keeping rates at 5%-5.25%, per CMEGroup’s Fedwatch tool. But there’s a 51% chance of a 25-basis point hike in July, reflecting uncertainty.

China’s Gold Demand Faces Challenges

In the meantime, China, the world’s leading consumer of gold, witnessed a sharper-than-expected decline in exports and a slower pace of imports in May. Manufacturers faced challenges in finding demand abroad, while domestic consumption remained sluggish. These developments have implications for the overall demand for gold in the market.

Market Awaits Fed’s Impact on Gold

Traders and investors are closely monitoring the Fed’s decision as it is crucially shaping the short-term outlook for gold prices. The interplay between the dollar, supply and demand dynamics, and inflationary pressures is currently playing a significant role. They are gauging the potential impact on the value of the precious metal by closely monitoring upcoming data releases and central bank statements.

Technical Analysis

Gold (XAU) is trading on the bearish side of $1992.24 (PIVOT), putting it in a weak position. It’s also trading on the strong side of $1917.41 (S1).  The mid-point of this range is $1954.83. The main trend may be down, but trading above this mid-point  also indicates that momentum may be getting ready to shift to the upside.

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

Longer-term, a sustained move under $1992.24 (PIVOT) will indicate the selling pressure is still strong. If this creates enough downside momentum then look for the selling to possibly extend into $1917.41 (S1).