Gold Price Forecast XAU/USD – Lower on Position-Trimming Ahead of Fed Meeting

Gold futures are edging lower early Tuesday as investors positioned themselves ahead of the U.S. Federal Reserve 2-day policy meeting set to begin on Tuesday.

Although expectations of a slowdown in rate hikes have helped bullion reach its highest level since last April, the market has been under pressure since last Thursday with rising Treasury yields driving up the U.S. Dollar. The catalyst behind the move has been mixed U.S. economic data.

At 05:44 GMT, April Comex gold futures are trading $1932.80, down $6.40 or -0.33%. On Monday, the SPDR Gold Shares ETF (GLD) settled at $178.77, down $0.45 or -0.25%.

Gold Traders Eyeing Fed

The Fed will release its widely anticipated interest rate decision at 19:00 GMT on Wednesday. The market is looking for the central bank to raise its benchmark rate by 25-basis points. But that is only part of the story.

The other part involves the Fed’s terminal rate. Ahead of the rate hike announcement, the market is anticipating a terminal rate of about 4.94%, while recent Fed speakers have been projecting a terminal rate north of 5.0%. This disparity is likely to be the source of volatility.

Uncertainty Being Fueled by Mixed US Economic Data

Last week’s mixed economic data raised some concerns ahead of the Fed’s interest rate announcement.

On the dovish side, expectations for a slowdown in Fed rate hikes grew after the Fed’s preferred inflation gauge – U.S. consumer spending – fell for a second straight month in December, putting the economy on a lower growth path heading into 2023.

However, the number of people filing for jobless benefits keeps dropping – signaling a tight labor market that could force the Fed to keep hiking rates.

Meanwhile, the benchmark U.S. 10-year bond yield is hovering near a two-week high, helping the U.S. Dollar recover some of its recent losses.

Demand for gold, which pays no interest, tends to drop when yields are rising since it increases the opportunity cost of holding bullion. Additionally, a stronger U.S. Dollar makes gold more expensive to foreign buyers.

Short-Term Outlook

The current retreat from the recent 9-month high suggests some weak longs are taking protection against a hawkish surprise from the Fed, which could drive prices back toward $1900.00.

The next major move in gold is likely to be determined by the Fed’s tone in its monetary policy statement and post-meeting press conference.

The Fed could trigger another spike to the upside if it slows down the pace of its rate hikes and inflation comes back. Or if it announces a pause in rate hikes and inflation is still relatively high.