Gold Outlook: Fed’s interest rate decision eyed

Gold’s price tended to move higher since our last report. It seems though as if the market remains uncertain ahead of the Fed’s interest rate decision. Today we are to discuss the fundamental challenges laid ahead for the precious metal, while we will be concluding this report with a technical analysis of gold’s daily chart.

Uncertainty builds up

The recent drone attack of a US post in Syria, leaving three dead and twelve wounded tends to increase the tensions in the area. The attack is believed by Western media to have been mounted by an Iranian-backed militia and the US vowed to retaliate. It should be noted that the attack may prove to be a qualitative factor, leading to an escalation of the tensions in the area in a higher level. 

The pressure on US President Biden to respond by hitting Iranian targets is mounting and it may prove to be a very fine line for the US to respond proportionally without the situation getting out of hand. Should the tensions escalate further, we may see gold enjoying safe haven inflows in the coming few days.  

The Fed’s interest rate decision

The scenery for the gold market this week seems to be dominated also by the Fed’s interest rate decision on Wednesday. The bank is widely expected to remain on hold on Wednesday and we have no reason to doubt for such a scenario to materialise, yet there is a large question mark looming over the tone of the accompanying statement and Fed Chairman Powell’s press conference later on. On the other hand, the easing of inflationary pressures in the US economy as shown also by the latest release of the Core PCE price index for December and the hit on economic activity of the US manufacturing sector tend to suggest that an easing of the Fed’s tight monetary policy is possible. On the flip side, the relative tightness of the US employment market could allow the Fed to maintain rates high for a longer period than what the market currently expects.

Overall, should the bank maintain a more dovish tone indirectly reaffirming the market expectations for extensive rate cuts starting from May onwards, we may see the USD weakening and should the negative correlation of gold with the greenback kick in, such a scenario may provide some support for gold’s price. On the flip side, should the Fed sound more hawkish by implying that any rate cuts are not planned for now, or that there will be a delay in the timing of rate cuts, we may see the USD gaining asymmetrically and thus weighing on gold’s price.

January’s employment report

We note as another big test for gold’s price the release of the US employment report for January on Friday. The unemployment rate is expected to tick up to 3.8%, the average earnings growth rate to remain unchanged at 4.1% yoy and the NFP figure to drop to 180k if compared to December’s 216k.

Yet forecasts of the US employment data have been disproven a number of times in the past, thus an element of uncertainty is present for the release which may raise volatility for the markets. Should the actual rates and figures meet their respective forecasts, or be even worse, we may see the USD weakening as the data tend to imply a crack in the tightness of the US employment market and given the negative correlation of the USD with gold’s price a possible strengthening of the greenback could weigh on gold’s price.

Gold: Technical Analysis

XAUUSD Daily Chart

• Support: 2013 (S1), 1972 (S2), 1930 (S3)
• Resistance: 2055 (R1), 2090 (R2), 2135 (R3)

We make a start by noting gold’s price edging higher, yet remaining well between the 2013 (S1) support line and the 2055 (R1) resistance line. For the time being we tend to maintain our bias for the sideways motion of the precious metal’s price, to continue. Also, please note that the RSI indicator runs along the reading of 50, implying a rather indecisive market, which may allow the sideways movement to be maintained. Furthermore, the price action seems to be relaxed within the narrowing Bollinger bands, reflecting the lessening volatility of the past few days, yet with a slight downward slope.

Yet, to switch our sideways movement bias in favour of a bearish outlook, we would require gold’s price to break the 2013 (S1) support line and aim for the 1972 (S2) support hurdle. Further southwards, we note the 1930 (S3) support base, which held its ground and reversed the downward price action on the 13th of November last year. On the flip side, given the slight upward tendencies of the past few days, should the bulls take charge of the precious metal’s direction, we may see gold’s price breaking the 2055 (R1) resistance line and aiming for the 2090 (R2) resistance nest, while even higher we note the 2135 (R3) resistance barrier, which is also the all-time high price of gold.

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