In the early American session on Tuesday, the price of gold (XAU/USD) rallied above a two-day high, nearing the $2,190 mark. This uptick comes as the US Dollar experiences a correction. The Dollar faces downward pressure as Federal Reserve (Fed) policymakers signal a growing confidence in easing price pressures. Despite recent hot inflation readings in January and February, the Fed foresees three interest-rate cuts this year.
Factors Driving Gold Prices
Federal Reserve’s Monetary Policy
Investors are closely monitoring cues regarding the inflation outlook, anticipating clues on when the Federal Reserve might commence interest rate reductions. Of particular interest is the United States core Personal Consumption Expenditure price index (PCE) data for February, scheduled for release on Friday.
Expectations of easing price pressures could bolster Gold prices, as they would diminish hopes for the Fed to maintain higher interest rates for an extended period. Conversely, stubborn inflation data may adversely affect Gold prices by increasing the opportunity cost of investing in the precious metal. In such scenarios, investors may pivot towards interest-bearing assets like bonds, attracted by higher yields.
Market Reaction and Outlook
Gold price continues its ascent to $2,190, benefitting from a slight downturn in the US Dollar. The metal’s upward trajectory is further propelled by indications that Federal Reserve policymakers are inclined to lower interest rates come June, buoyed by mounting evidence of inflation moving in a favorable direction.
Meanwhile, the US Dollar Index (DXY), gauging the Dollar’s strength against six major currencies, retreats from a one-month peak of 104.50 to 104.10.
Fed officials remain optimistic about alleviating inflationary pressures, despite higher-than-expected price pressures in the initial months of 2024. Fed Governor Lisa Cook, speaking at an event hosted by Harvard University, noted a decline in the rate of increase on new rental leases, indicating a potential downtrend in housing-services inflation.
Separately, Chicago Fed Bank President Austan Goolsbee expressed uncertainty regarding the inflation situation, particularly due to elevated housing inflation. Nonetheless, he remains confident in inflation returning to the Fed’s 2% target.
Market Projections
Last week, the Fed reaffirmed its stance on reducing interest rates three times this year, bolstering market expectations for rate cuts starting in June. According to the CME FedWatch tool, there’s nearly a 70% probability of a rate cut announcement in June, up from 60% last week.
Investor focus this week will shift to the core PCE price index data for February, offering insights into the timing of Fed rate cuts. Projections suggest a steady annual core PCE growth of 2.8%, with monthly inflation data expected to rise by 0.3%.
Technical Analysis and Price Forecast
As momentum indicators rebound, the Gold price sees a recovery to $2,180. The 14-period Relative Strength Index (RSI) inches up, having previously signaled extreme overbought conditions during last week’s correction from all-time highs of $2,223.
In the near term, bullish sentiment prevails for Gold, supported by the upward slope of the 20-day Exponential Moving Average (EMA) at $2,145. Looking ahead, the Gold price may encounter resistance near the 161.8% Fibonacci extension level at $2,250, while downside support is likely at the December 4 high of $2,144.48.
