Gold Price Forecast XAU/USD – Investors Spooked by Fed’s Hawkish Tone

Gold is sharply lower on Thursday, dropping more than 1% while hitting a one week low. The catalyst behind the move is a stronger U.S. Dollar. It is driving down foreign demand for dollar-denominated bullion. Underpinning the greenback is the hawkish U.S. Federal Reserve.

At 11:25 GMT, February Comex gold is trading $1790.00, down $28.70 or -1.58%. On Wednesday, the SPDR Gold Shares ETF (GLD) settled at $168.09, down $0.42 or -0.25%.

Fed Stays Hawkish, Disappointing Gold Bulls

Gold prices were hovering near a multi-month high shortly before the Fed made its interest rate and monetary policy announcements Wednesday afternoon.

In its final meeting of 2022, the Federal Reserve hiked rates by 50 basis points, or half a percentage point. The move was widely expected by economists and investors. The move brought the Fed funds rate to a range of 4.25%-4.50%. Gold traders seemed to have no problem with that decision.

However, gold investors were surprised when the Federal Reserve indicated Wednesday it sees the so-called terminal rate – or the high water mark for the fed funds rate – at 5.1%. At that point, officials are likely to pause to allow the impact of the monetary policy tightening make its way through the economy.

The consensus then pointed to a full percentage point worth of rate cuts in 2024, taking the funds rate to 4.1% by the end of that year. That is followed by another percentage point of cuts to a rate of 3.1%, before the benchmark settles into a longer-run neutral level of 2.5%, CNBC reported.

Fed Chair Powell Wants ‘Substantially More Evidence’ that Inflation is Cooling

Federal Reserve Chairman Jerome Powell said Wednesday the recent positive signs for inflation aren’t enough for the central bank to ease back on interest rate increases.

“It will take substantially more evidence to have confidence that inflation is on a sustained downward” path, Powell said during his post-meeting news conference.

Short-Term Outlook

We’re looking at a delayed reaction in the gold market to the Fed’s hawkish comments on Wednesday.

The trend is up on the daily chart so the selling pressure is likely being fueled by profit-taking. Our work suggests the liquidation could continue for several more days until gold reaches a value area.

The best support or value area is $1734.70 to $1710.50.

Essentially, gold is overvalued over the short-run, but longer-term traders could be looking at the light at the end of the tunnel. Short-term traders are being forced to adjust positions to the Fed’s new projections. Longer-term investors should be happy that the Fed is even discussing an end strategy and a cooling off period.