Gold is on track to finish its third consecutive month in the greens, yet in the past few sessions it has been on the retreat as traders sided with caution and shifted their attention towards tomorrow’s highly anticipated Fed interest rate decision. Nevertheless, the precious remains near nine-month highs supported by recession speculations and the prospects for a less hawkish Fed. In this report we aim to shed light on the catalysts driving the precious metal’s price, assess its future outlook and conclude with a technical analysis.
Traders zero in Fed’s decision
Tomorrow the Federal Open Market Committee is scheduled to convene, and the market awaits in anticipation the first interest rate decision for this year from the Federal Reserve. The central bank has scaled down its interest rate magnitude to 50 basis points in December, after four straight 75 basis point increases and tomorrow the market foresees a 25-basis points hike. The view for a less hawkish approach stems from updated data indicating that inflationary pressures are abating, a robust employment market and better than expected growth results in the past quarter, alongside the explicit comments from officials who favor a downshift. The increase by 25 basis points would bring the key policy rate to 4.75%, shy of 50 basis points from the terminal rate of 5.25%, indicated in the December’s dot plot graph. Market participants however, have increased their speculative bets throughout January forecasting that the central bank will not push rates as far as 5.25% and will be forced to cut rates around the start of the third quarter, as they anticipate that inflationary pressures will dissipate faster than expectations and the US economy will enter a “mild” recession. Since the market has almost fully priced in 25 basis points rate hike according to the FFF, the crucial aspect of the meeting is now the speech of Fed Chair Powell alongside the forward guidance contained in the accompanying statement. Should there be a signal that the central bank is close to the end of its tightening cycle, the market may interpret that as dovish and we may see the dollar drift lower and the precious advance, since the prospect of lower interest rate rises, increase the opportunity cost of holding the non-yield bearing bullion. Should however, we see Fed Chair Powell push back on the narrative for looser financial conditions, we may see the dollar strengthen, pressuring the shiny metal further off its 9-month highs.
US Employment report lurks on Friday
Looking past Wednesday’s Fed interest rate decision, the next test for gold will be the US employment report, due out on Friday. The US labour market proved to be more resilient than anticipated, defying expectations for deterioration and remains robust. Last week the weekly initial jobless claims figure eased more than expected, as only 186k people filed for unemployment benefits, below expectations for 205k. On Friday, the Non-Farm Payrolls figure is expected to drop to 175k from 223k from the previous month, the Unemployment rate is expected to uptick to 3.6% when compared to the 3.5% of the previous month, and the year-on-year average earnings are also forecasted easing to 4.3%, down from the 4.6% of the prior month. Should the actual rates and figures match expectations, we might expect to see the dollar weaken as the results would practically imply that the labour market is losing momentum. It is worth pointing out nonetheless, that the forecasted results indicate from a historical point of view, that the labour market remains relatively stable. That as a consequence may fuel optimism for a less hawkish Fed down the line and due to the negative correlation between the greenback and the precious, we would therefore expect to see the bullion being positively predisposed for further upside, since the prospect for smaller rate hikes, polish the shiny metal’s appeal.
XAUUSD H4 Chart
- Support: 1900 (S1), 1880 (S2), 1860 (S3)
- Resistance: 1920 (R1), 1945 (R2), 1970 (R3)
Looking at XAUUSD 4-hour chart we observe gold’s price peak around the $1945 (R2) level during last week, followed by the break below the ascending trendline initiated on the 17th of January alongside the move to lower ground as traders retreat to caution ahead of the Fed’s decision. We switch our bias to sideways given the break of the ascending trendline, with the price action being confined between $1880 (S2) support and $1920 (R1) resistance levels, to account for any potential volatile price reactions following the decision. The RSI indicator below our 4-hour chart registers a value of 35, showcasing that currently bearish sentiment surrounds the precious. Validating the view that the bears are currently in control, is the breach of the price action below the lower bound of the Bollinger band, however some support may be expected to take place near the 100-period Moving Average. Should the bears reign over, we may see the break below the $1900 (S1) support base and head for the $1880 (S2) support base. Should on the other hand the bulls take initiative over the direction of the shiny metal’s price, we may see the break above the $1920 (R1) resistance level and head for the $1945 (R2) resistance level.
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