Gold Prices Forecast: Bearish Outlook Amid Lower Fed Rate Cut Expectations

Key Points

• Unexpected CPI Data Impacts Gold’s Value
• Surge in Treasury Yields Challenges Gold’s Appeal
• Strong U.S. Dollar Adds Pressure to Gold Prices

Sellers Influenced by Multiple Factors

Gold prices are edging lower on Wednesday, following a significant drop through the critical $2,000 threshold in the previous session. This downward trend is being influenced by a confluence of factors, including unexpected U.S. Consumer Price Index (CPI) data, a surge in Treasury yields, a strengthening U.S. Dollar, key technical support levels, and shifting expectations regarding Federal Reserve rate policies.

At 08:32 GMT, XAU/USD is trading $1993.09, down $26.92 or -1.33%.

CPI Data Impact

Recent CPI data indicates a 3.1% annual increase, surpassing expectations. This higher-than-anticipated inflation rate is reducing the likelihood of an early rate cut by the Federal Reserve, impacting gold prices negatively. The rise in consumer prices, driven by shelter and healthcare costs, suggests persistent inflationary pressures.

Treasury Yields Influence

Yields on the 10-year Treasury note reached a 2-1/2-month high at 4.32%, with expectations of further increases. Higher yields diminish the appeal of gold, as they offer an alternative investment return. The market anticipates yields might breach the 5.00% mark, a level last seen in October 2023.

US Dollar Strength

The dollar index (.DXY) is hovering near a three-month high, strengthened by the inflation data. A stronger dollar makes gold more expensive for holders of other currencies, thus dampening its demand. Speculators are eyeing 105.628 as the instrument’s next target, which doesn’t bode well for gold traders with the dollar index currently at 104.899.

Technical Support Levels

Gold’s next critical support level is around $1,973.09, a figure aligned with the December Federal Open Market Committee’s (FOMC) rate cut announcement in mid-December 2023. However, further declines could trigger additional sell-offs with the 200-day moving average at $1965.53 another potential target level.

Short-term Forecast

Considering these factors, the short-term outlook for gold appears bearish. Persistent inflation, robust yields, and a strengthening US dollar are creating headwinds for gold prices. The Fed’s hesitation to implement rate cuts until potentially June further solidifies this bearish outlook. Investors’ focus will now shift to upcoming U.S. retail sales data and PPI numbers, as well as comments from Federal Reserve officials, including Chairman Jerome Powell, for future rate cut indications.

Technical Analysis

Gold (XAU/USD) is under pressure for a fourth straight session on Wednesday after breaching the 50-day moving average late last week. This move marked a shift in the intermediate trend to down. It’s resistance comes in today at $2030.98.

Given the current downtrend and expanding momentum, the market appears to be on a path toward the 200-day moving average at $1965.52. This indicator represents the long-term trend.

Watch for a technical bounce on the first test of this moving average, with another acceleration to the downside likely if it fails as support.