Gold Price Forecast XAUUSD – Lower as Investors Seek More Clarity from Federal Reserve

Gold futures closed lower on Friday and for the week after hitting its highest level in three months on Wednesday. Investors started booking profits as hawkish Federal Reserve officials indicated that more interest rate hikes were in the offing.

On Friday, February Comex gold futures settled at $1769.00, down $8.80 or 0.50%. The United States Oil Fund ETF (USO) settled at $69.04, down 1.10 or -1.57%.

Fed Members Create Uncertainty, Encouraging Profit-Taking

Gold futures are up over $100 this month since bottoming the first week of November following a U.S. Non-Farm Payrolls report that showed an unexpected rise in the unemployment rate. Prices soared after a surprisingly cooler U.S. inflation report nearly cemented a 50 basis point rate hike in December, possibly bringing an end to a streak of 75 basis point rate hikes by the Fed.

Profit-takers started to come in last Wednesday as hawkish commentary from several Fed official started to heat up. The central theme from the policymakers was higher rates are coming.

While the Fed may slow the pace of rate hikes from 75 basis points to 50 basis points, they may also extend the time period for rate hikes. This means we could be looking at much higher than expected terminal rate, or the rate at which the Fed stops raising rates.

It’s the uncertainty of when the Fed will stop raising rates and how high rates will be when they do that is encouraging long speculations to book profits, driving prices lower. We’re not looking at the start of a change in trend per se, but rather a “When in doubt, get out” strategy.

Fed’s Bullard Set the Bearish Tone

Gold was testing a three month high on Wednesday when St. Louis Fed President James Bullard killed the rally with powerful hawkish remarks.

Bullard said the Fed’s target policy needs to rise to at least a range between 5.00% and 5.25% from the current level of just below 4.00% to be “sufficiently restrictive” to curb inflation, though he would defer to Fed Chair Jerome Powell regarding how much higher to move rates at upcoming policy meetings.

Short-Term Outlook

After topping out at $1791.80 last week, gold prices are now retreating with traders probably looking for a break into a value zone before re-entering on the long side. Our target zone is $1705.00 to $1684.60.

The market is still likely to be data driven so gold bulls will be looking for supportive data that confirms inflation is falling and the economy is weakening. This scenario will give the Fed more room to slow tightening.

Like the Fed members said, one piece of data will not be enough to shift the tone of their hawkish message. They want to continue to see further confirmation that inflation is falling.