Gold Prices Held Hostage by Fed Expectations? What Next for XAU?
Gold Prices Held Hostage by Fed Expectations
As interest rates continue to rise around the world, gold has been caught in the crossfire of the Fed’s monetary tightening and dollar strength. The US central bank’s hawkish stance has seen the US dollar strengthen to new highs against most currencies, including the euro, Japanese yen, pound sterling, and Canadian dollar, as well as the Swiss franc, Indian rupee, Chinese yuan and Turkish lira.
A weaker USD is a boon for precious metals, which are denominated in dollars, as it allows buyers in other currencies to purchase more of the yellow metal. However, a stronger dollar can also hurt gold demand as it makes the metal more expensive for overseas buyers.
XAU Holds Ground on Breakdown in Local Resistance
Despite the weakness of a weaker USD, a rally in the XAU/USD has seen the precious metal recover above $1900 and hit its highest price in a year as of late. The market is now looking ahead to today’s key US economic data – with the US CPI set to come out this afternoon. The market will likely focus on the headline inflation figure as it could signal whether or not the Fed has a plan to slow down the pace of its rate hikes.
If the US CPI reading comes in lower than expected this week, we can see a further decline in the XAU/USD towards its lowest level since October, which would be the beginning of a correction. If the US CPI reading is higher, we can expect a retracement to the previous breakout point of $1910.
We believe a slowdown in the pace of Fed interest rate hikes will give the XAU/USD room to run and should be welcomed by the market as it offers investors the opportunity to invest in an alternative asset class with a stable underlying value. If the market can sustain its recent bullish move, the XAU/USD is likely to reach $4,000 per ounce in 2023.