Gold Prices Held Hostage by Fed Expectations – What Next for XAU?

Gold Talking Points:

Gold futures have struggled to recover from last week’s declines which drove XAU/USD below $1900. After climbing to a nine-month high of $1975.2 last week, the release of strong US economic data and a break of trendline support ended the three-month rally that has been driving the recovery from the October low of $1618.3.

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In response to the robust job data and positive ISM figures, recession fears were overshadowed by prospects of further rate hikes. As the 22% rally from the October lows fizzled out, both technical and fundamental factors contributed to Gold’s decline.

DailyFX Economic Calendar

Although gold and silver are safe-haven assets that are often used as a hedge against inflation, the non-yielding commodities are sensitive to rising interest rates.

After the Federal Reserve announced a softer 25 basis-point rate hike at the FOMC meeting earlier this month (1 Feb), gold prices temporarily surged before peaking at $1975.2. With investors interpreting the slower rate hike as a sign that the Fed could continue to slow down the pace of tightening, the announcement did not catch markets off-guard.

Gold (XAU/USD) Technical Analysis

Since market participants had already priced in a 99% probability of a 25-basis point rate hike, gold’s upside was limited. As gold futures rose above the March 4th 2022 high of $1974.9, a series of doji candles appeared on the four-hour chart, indicative of indecision.

With the 24 February 2022 (the onset of the war in Ukraine) high holding at $1976.5, the firm barrier of resistance held firm, allowing bulls to go no further than $1975.2.

Gold (XAU/USD) four-hour chart

Chart prepared by Tammy Da Costa using TradingView

As sellers forced prices lower, a break of prior trendline support (from the October low) drove XAU/USD back below $1930. Then, there was the release of the US NFP report which came in well-above estimates. With 517,000 jobs being added to the US economy in January, Gold prices continued to decline before stabilizing around $1880.

Gold Daily Chart

Chart prepared by Tammy Da Costa using TradingView

On the weekly chart below, a rejection of the upper wick at the current monthly high was accompanied by a sharp pullback and a retest of $1873.2. Simultaneously, the weekly CCI (commodity channel index) eased back from overbought territory suggesting that bulls had run out of steam. With the current weekly candle showing little movement, a tight range has formed between $1873 and $1880.

Gold (XAU/USD) Weekly Chart

Chart prepared by Tammy Da Costa using TradingView

Just below that, the 23.6% Fibonacci of the 2018 – 2020 move has formed an additional zone of support at $1871.6. If prices fall below this level, prices could continue to decline, towards the next support target of $1836.6.

— Written by Tammy Da Costa, Analyst for DailyFX.com

Contact and follow Tammy on Twitter: @Tams707