Gold Price Forecast XAU/USD – Traders Setting Aside Rate Hike Fears Ahead of Key PMI Report

Gold futures are edging higher on Wednesday, confirming yesterday’s dramatic technical reversal bottom. There were no major changes in the fundamentals to warrant a rally so we’re going to chalk-up the move to short-covering and profit-taking due to technically oversold conditions.

Further complicating the reason for the move is firm Treasury yields and a weaker U.S. Dollar. Typically, both move in the same direction. Gold tends to weaken when yields rise because it’s a non-yielding asset. Bullion also tends to decline when the greenback rises. Since it is a dollar-denominated asset, it becomes less-attractive to foreign buyers when the greenback is strong.

At 07:27 GMT, April Comex gold futures are trading $1841.50, up $4.80 or +0.26%. On Tuesday, the SPDR Gold Shares ETF (GLD) settled at $169.79, up $0.78 or +0.46%.

Still in ‘Sell the Rally’ Mode

Gold is currently oversold by some technical measurements. Furthermore, it held its 200-day moving average, which is an attractive level for some robo-traders. Nonetheless, the fundamentals are overwhelmingly bearish with the Fed likely to raise rates until at least June. Combining this with the technical downtrend, puts the market in “sell-the-rally” mode.

Traders expect the Fed to hike rates 25-basis points in March, May and June. Money markets expect the U.S. central bank’s target rate to peak at 5.420% in September, from a current range of 4.50% to 4.75%. Furthermore, traders have eliminated the chances of rate cuts this.

This represents quite a change from Jan. 31 when money markets were looking for rates to peak at about 4.88% after a 25-basis point rate hike in March and for the Fed to slash rates at least two times before the end of the year.

Bullion Sinks in February

The drastic change in the terminal rate from 4.88% to 5.40% was the primary reason why gold prices plunged in February. Gold posted its worst month since June 2021 last month after a string of U.S. data pointed to a resilient economy and a tight labor market, stoking fears that the U.S. Federal Reserve would extend its interest rate hiking campaign to curb inflation.

Short-Term Outlook

On Wednesday, gold traders will get the opportunity to react to the U.S. ISM Manufacturing PMI report. It is expected to rise from 47.4 to 47.9. This puts it under 50, which is the figure that separates expansion from contraction.

A strong than expected reading could be bearish for gold because it will indicate the Fed still needs to do more work to drive down inflation. A miss to the downside could trigger further short-covering in gold.