Gold Price Forecast XAU/USD – Traders Taking Profits after Pricing in 25 Basis Point Rate Hike

Gold futures are inching lower after briefly piercing a seven-month high earlier in the session on Monday. The price action appears to be in response to a rebound in Treasury yields and a technical bounce by the U.S. Dollar. Relatively low volume could be another factor contributing to the intraday move with the U.S. on a bank holiday.

At 07:58 GMT, February Comex gold futures are trading $1919.70, down $2.00 or -0.10%. On Friday, the SPDR Gold Shares ETF (GLD) settled at $178.73, up $2.09 or +1.18%.

Underpinned by Hopes of Slower Fed Rate Hike

One factor supporting gold prices is expectations of slower interest rate hikes from the U.S. Federal Reserve. The Fed raised rates by 75 basis points (bps) four times last year, before slowing to a 50 bps increase in December. Most traders expect a 25 bps hike at the U.S. central bank’s next policy meeting on Jan. 31-Feb. 1.

Cooling US Inflation Should Influence the Fed

A dip in U.S. inflation in December reported last Thursday convinced gold traders to raise expectations of a 25 bps rate hike at the Fed’s Jan. 31 – Feb. 1 meeting.

The data showed that U.S. consumer prices fell for the first time in more than 2-1/2 years last month. Following the release of the data, Fed policymakers expressed relief that inflation continued to ease in December, paving the way for a possible step down to a 25 bps rate hike increase at its next rate hike announcement on February 1.

Lower interest rates tend to be beneficial for bullion, decreasing the opportunity cost of holding the non-yielding asset.

Fed Could Lower Size of Rate Hike, but Not Necessarily Terminal Rate

There is no question that the Fed is the focus for gold traders. Currently, these traders are of the view that the Fed’s rate hike cycle is slowing and may come to an end soon.

However, it all depends on how one interprets recent comments from Fed officials. Although members of the Fed were quick to highlight that while the CPI numbers were moving in the right direction, they stood by their stance to bring levels back to 2%. They see rates rising “slower but longer and potentially higher.”

Philadelphia Federal Reserve Bank President Patrick Harker and St. Louis Fed President James Bullard see rates landing north of 5% to tame inflation, which peaked to 9.1% in June 2022.

Short-Term Outlook

As we head into a new week, investors are pricing in a roughly 90% chance for a 25 basis point hike to a range of 4.50% to 4.75% at the next meeting. This level is likely to hold steady which will support gold prices unless U.S. retail sales data, due on Wednesday, comes in well above expectations.