Gold Price Forecast XAU/USD – Early Gains Capped by Fed Rate Hike Concerns

Gold futures are edging higher on Monday is a lackluster trade with investors responding to a slightly weaker U.S. Dollar. Gains, however, are being limited by firm U.S. Treasury yields.

Traders are saying that as long as the Federal Reserve indicates its intent to raise interest rates further to fight inflation, gold’s upside is likely to be limited. However, we should see a strong rebound once the central bank says interest rates are close to the end of rate hikes.

At 12:10 GMT, February Comex gold futures are trading $1804.90, up $4.70 or +0.26%. On Friday, the SPDR Gold Shares ETF (GLD) settled at $166.77, up $1.42 or +0.86%.

Hawkish Fed Put Cap on Rally

Last week, Federal Reserve Chairman Jerome Powell temporarily killed the rally in gold when he said the central bank will deliver more interest rate hikes next year even as the economy slips toward a possible recession. His argument is that a higher cost would be paid if the U.S. central bank does not get a firmer grip on inflation.

His comments on Dec. 14 followed a 50 basis point rate hike, which was approved unanimously by Fed policymakers and widely expected by financial markets. The move lifted the targeted policy rate to the 4.25%-4.50% range, with officials expecting it to rise to a level between 5.00% and 5.25% next year.

Perhaps further limiting any advance in gold over the near-term, three Federal Reserve policymakers suggested on Friday that the U.S. may have to lift U.S. borrowing costs above the peak 5.1% they signaled at last week’s policy meeting. Furthermore, they also said that once rates have peaked, they should stay there into 2024 to squeeze high inflation out of the economy.

Short-Term Outlook

Gold is hovering just under its recent high at $1836.90. The market has weaken as investors lightened up on the long side after the Powell’s comments, but the impact was mild on prices.

Our work suggests that the best value area for gold is $1734.70 – $1710.50. In order to get there, however, the selling pressure is going to have to be strong enough to wipe another $100 off the charts. But that’s how the market works. Break it hard to scare out the weaker longs then buy it when it’s relatively cheap because nobody wants it.

The other choice is to trade momentum and play for a breakout to the upside.

The Christmas and New Year holiday trade officially began on Monday so look for below-average volume. Typically, this means be careful buying strength and selling weakness.

Fundamentally, the news is scarce this week, but Friday’s U.S. core personal consumption expenditure (PCE) data could be a market moving event.