Gold regains half of the ground lost after the Fed’s decision
- Gold bounces up from oversold levels to pare back post-Fed losses.
- A strong US Dollar and higher US yields weighing on Gold’s recovery.
- XAU/USD remains under pressure, with resistances at $2,625 and $2,6660 likely to cap upside attempts.
Gold (XAU/USD) trades higher on Thursday, regaining some of the ground lost on Wednesday after the Federal Reserve’s (Fed) monetary policy decision. At the time of writing, the precious metal has reached the $2,620 area after bouncing from $2,580 lows the prior day.
The Fed cut rates as expected but raised its growth and inflation expectations and scaled down the interest rate cut projections for next year. This, coupled with an unusually hawkish tone from Fed Chairman Jerome Powell, triggered a risk-averse reaction, sending the US Dollar Index (DXY), which tracks the USD value against six major currencies, to test two-year highs and crushing Gold and equities.
Higher US yields and a strong USD are likely to limit Gold’s recovery
- As widely expected, the Federal Reserve cut rates by 25 basis points (bps) to the 4.25%-4.50% range on Wednesday. However, policymakers slashed their easing projections to just two rate cuts in 2025 from the four cuts estimated in September.
- Next year’s Personal Consumption Expenditures (PCE) inflation expectations were increased to 2.5% from 2.1% in September. Chairman Powell suggested that some officials considered the impact of Trump’s policy expectations on their inflation projections.
- Likewise, US economic growth expectations were revised to 2.5% this year and 2.1% in 2025, from previous estimations of steady 2.0% GDP growth in both years.
- The labour market is also expected to be more resilient. The unemployment rate is expected to be 4.2% this year and 4.3% next year, down from the 4.4% previously foreseen for those two years.
- The central bank’s projections and an unusually hawkish tone from Fed Chairman Jerome Powell sent US Treasury yields rallying. The benchmark 10-year yield has reached levels above 4.5% after rallying about 40 basis points from last week’s lows.
- In the US, the focus now is on Friday’s US Personal Consumption Expenditures (PCE) Prices Index figures for November to compare them with the bank’s inflation expectations. A softer-than-expected reading would ease the risk-averse mood and provide some support for Gold.
Technical analysis: XAU/USD’s upside attempts will likely be capped below $2,625 or $2,660
Gold is experiencing a corrective recovery after having wreaked heavily oversold levels, but the broader trend remains bearish. The impulsive bearish candle in the daily chart printed on Wednesday highlights the negative momentum and gives sellers fresh hope.
Price action is struggling to overcome the previous support, now turned resistance at the $2,625-$2,630 area (November 28, December 2 lows). Above this, the next target will be the December 17 high at $2,650. On the downside, supports are at Wednesday’s low of $2,580, ahead of November’s trough at $2,540.
XAU/USD 4-hour Chart
Gold FAQs
Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.
Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.