Gold Price Forecast: XAU/USD bulls take a break, await new Federal Reserve clues
- Gold price breaks out of descending parallel channel as market mood improves.
- US Dollar sell-off halted by rising US Treasury bond yields.
- ISM Services PMI release is still awaited for fresh impulse on XAU/USD.
Gold price rallied in the first half of the trading week, breaking out of a bearish trend that had dominated XAU/USD price action for most of February. This recent surge was halted early on Thursday as US Treasury bond yields gathered strength and supported the US Dollar. Gold traders now await more Federal Reserve clues, which could come from Fed officials’ speeches and Friday’s ISM Services PMI.
In the meantime, investors are watching the US Treasury bond yields, which in the case of the benchmark 10-year bond, have seen a rally past the 4% resistance and is nearing levels not seen since last October. Due to the inverse correlation of Gold price with the US Treasury yields, this could provide further downward pressures on XAU/USD.
Gold news: ISM Manufacturing PMI mixed, soft US Consumer Confidence
Earlier in the week, soft data from the United States, led by decreasing inflation expectations in the CB Consumer Confidence report released on Tuesday, triggered some profit-taking on the US Dollar longs, as the reading might somewhat ease the pressure on the Federal Reserve to increase its interest rate hike path again. This was followed on early Wednesday by higher-than-expected Purchasing Managers Index (PMI) readings in China, which improved the market mood in Asia.
The Institute of Supply Management (ISM) released on Wednesday its Manufacturing PMI report on Wednesday with mixed results. While the headline number slightly disappointed (47.7 vs 48 expected) and remained in contraction territory, and the employment sub-index also fell below 50 (49.1 vs 51 expected), the ISM Manufacturing Prices Paid number jumped out from 44.5 to 51.3, way above the 45 consensus expectation. The latter number is the one that indicates how businesses identify inflation expectations, which are still at the front of Federal Reserve officials’ minds. Gold price retraced a bit but stayed in the green after the release.
United States Services PMIs on the way, watch for inflation clues
The Institute of Supply Management (ISM) will publish the Services PMI on Friday at 15 GMT. If this report reaffirms that rising wage costs are feeding into accelerating price pressures in the sector, the US Dollar is likely to hold its ground against Gold. Hence, the Prices Paid Index component will be watched closely by market participants.
It’s worth noting, however, that the CME Group FedWatch Tool shows that markets are fully pricing in at least two more 25 basis points Federal Reserve rate hikes in March and May. Additionally, the probability of the Fed holding the policy rate unchanged in June stands at 25%.
The market turnaround has confirmed that the US Dollar does not have a lot of room on the upside, at least until the February jobs report and inflation data confirm or refute one more 25-bps hike in June.
Gold price fundamentals point to the upside
ANZ economists believe the bright metal should trade to the upside in the coming weeks, taking into account that the Fed should have a tougher time raising interest rates:
Gold prices came under pressure amid mounting expectations of US rates staying higher, which gave fresh support to the USD. Rising US yields weighed on the non-yielding yellow metal, as it increases the opportunity cost.”
“While market expectations around the Fed’s stance are likely to guide Gold in the short-term, we see the macro backdrop remaining supportive for Gold with the Fed pausing its hiking cycle and the USD resuming its downtrend.
Gold price: The Federal Reserve impact
Gold price is no stranger to Federal Reserve monetary policy decisions. The US central bank has been on an interest rate-hiking quest since March 2022, raising the main policy rate from 0.25% to 4.75% in February 2023 to combat super-high inflation numbers. The US Dollar has been the greatest beneficiary of this move, as traders put a premium on the world’s reserve currency when cash became more costly to obtain. This dynamic generates, in turn, a depreciation in assets valued in US Dollar terms like Gold.
Gold price peaked at an all-time high in March 2022, reaching $2,070.54 right before the Federal Reserve started to raise its interest rates. Since then, Gold bears have been in command and the yellow metal reached a two-year low at around $1,620 three times between September and November 2022, effectively setting a triple-bottom pattern. This coincided with the last of the three Fed 75 basis points rate hikes of the year, and from there, Gold price set a super strong support platform from where it started rallying again.
Gold price in 2023: Up-and-down action
Financial markets have been a two-tale story for the early part of 2023, in which Gold price has reflected in its price action like no other asset. XAU/USD rode an uptrend during all of January with the market optimism about inflation slowing down and constant Federal Reserve dovish talk, only to see a drastic turnaround back to the old dynamics in February after a hot US Nonfarm Payrolls (NFP) report. The US economy adding more than 500K jobs in the month of January shifted the market expectations for the Fed easing its monetary policy, and the US Dollar has come back to the market King throne.
Gold price opened the year at $1,823.76 and reached a year-to-date high of $1,960 on February 2, right in between the first Federal Reserve meeting of the year and the surprising release of the US jobs report for January. Gold price went on a big downtrend from there, reaching year-to-date lows just above $1,800, where it found support.
Gold price daily chart