Gold Price Forecast XAU/USD – Weaker Dollar Supportive, but Fed Rate Hike Expectations Limiting Gains

Gold futures are inching lower on Wednesday after spiking to its highest level in a week the previous session. The price surge was fueled by a steep drop in the U.S. Dollar. Gains were likely limited, however, by a surge in Treasury yields.

At 09:30 GMT, February Comex gold is trading $1823.60, down $1.80 or -0.10%. On Tuesday, the SPDR Gold Shares ETF (GLD) settled at $169.10, up $2.78 or +1.67%.

Tuesday Recap

Gold prices climbed more than 1% on Tuesday on the back of a sliding dollar, as traders remained focused on the Federal Reserve’s interest rate strategy. The dollar fell as the Japanese Yen surged to a four-month peak after the Bank of Japan stunned markets by deciding to review its yield-curve control policy. The move by the BOJ also sent yields higher around the world. This may have put a lid on gold’s rally.

Fed’s Hawkish Tone Remains an Obstacle

Despite the knee-jerk reaction to the BOJ’s move away from its ultra-dovish monetary policy, gold could remain capped because the Federal Reserve has promised to deliver more interest rate hikes next year even as the economy slips towards a possible recession.

Last week, Fed Chair Powell argued that a higher cost would be paid if the U.S. central bank does not get a firmer grip on inflation. This was essentially “Fedspeak” for “higher rates are coming”.

Additionally, last week’s Fed policy-setting committee raised its benchmark overnight interest rate by half a percentage point and projected it would continue rising to above 5% in 2023, a level not seen since a steep economic downturn in 2007.

Despite Threat of Higher Rates, Some Investors Preparing for Fed Pivot

Bullion has shed more than $260 an ounce since its March peak as central banks stepped up efforts to fight soaring inflation. However, with some investors seeing the Fed moving close to a pivot, gold is enjoying its best quarter since early 2020, up 9.4% so far.

Short-Term Outlook

Tuesday’s price action may have been fueled by a weaker U.S. Dollar, triggered by a surprise move by the Bank of Japan that drove the Japanese Yen sharply higher. However, it doesn’t change expectations for higher interest rates by the Federal Reserve, which tend to be bearish for gold prices.

Furthermore, if the Bank of Japan is moving toward more hawkish policy, it means it will join all the other major central banks in tightening to stop the rise in inflation. This is potentially bearish for gold.

Gold bulls would like to see lower yields and a weaker U.S. Dollar. However, higher rates and a weaker dollar are likely to keep the market in a range over the near-term. The direction for prices will become clearer once the Fed announces a pivot. Until then look for a two-sided trade.