Gold Price Forecast: Will XAU/USD defend 200-DMA again after hawkish Federal Reserve?

Having failed to resist above the $1,800 mark, Gold price is extending the previous decline this Thursday, as the United States Dollar (USD) pauses its sell-off alongside the US Treasury bond yields. Investors assess the December US Federal Reserve (Fed) policy decision and Chair Jerome Powell’s comments.   

Hawkish Federal Reserve dents risk appetite, fuels US Dollar rebound

The United States Dollar has stalled its bearish momentum as risk-off flows dominate global markets. The US Federal Reserve’s hawkish outlook on interest rates triggers recession concerns, as the US central bank is seen keeping higher interest rates for longer. The latest uptick in the US Dollar is adding to the downside in the non-interest-bearing Gold price. The risk-off market profile reflects the United States bond market’s belief in lower US Treasury bond yields amid rising recession fears. Although a pause in the US Treasury yields declines, at the moment, it is allowing the US Dollar bulls to come up for air. However, the benchmark 10-year US Treasury bond yields continues to hold below the 3.50% critical level.

At its December policy meeting, the US Federal Reserve lifted its target rate by 50 basis points (bps) to 4.25%-4.50%, as widely expected but delivered a hawkish surprise by raising the terminal rate to 5.1% by end-2023 vs. 4.6% projected in September.  The US Dollar rebounded firmly from six-month lows on the Federal Reserve’s hawkish hike and downed the Gold price to near $1,795 before it recovered to settle the day at $1,807. The quick reversal in Gold price could be attributed to renewed sell-off in the US Dollar, as US Treasury yields failed to keep up the bounce following Federal Reserve Chairman Jerome Powell’s presentation. Jerome Powell signaled the central bank still has “some ways to go” in its campaign to rein in the stubbornly-high inflation. Powell clarified, "I wouldn’t see us considering rate cuts until the committee is confident that inflation is moving down to 2%,” squashing expectations of a ‘Fed pivot.’ Tough talks from the US central bank Chief fanned concerns of a potential recession.

Focus shifts to Bank of England and European Central Bank policy decisions

With the US Federal Reserve monetary policy verdict out of the way, all eyes now remain on the policy announcements from the Bank of England (BoE) and European Central Bank (ECB). Both the central banks are expected to slow down their pace of tightening by announcing a 50 bps rate increment. However, the language of the BOE and ECB policy statements and the future course of interest rates will be closely scrutinized, which will likely significantly impact the GBP/USD and EUR/USD pairs. The central banks’ economic assessments could also considerably impact risk sentiment.

The United States Dollar could see massive volatility on the European Central Bank decision if the bank triggers a big EUR/USD move. Therefore, Gold bulls would remain on the back seat, tracking the US Dollar price action heading into more central banking action.

Gold price technical analysis: Daily chart

The bearish wedge pattern remains in play, keeping Gold sellers in control, as the price closes in on the critical 200-Daily Moving Average (DMA) at $1,788.

Daily closing below the latter is needed to confirm a correction from five-month highs of $1,825 reached earlier this week.

The next downside cap is seen at the mildly bullish 21DMA at $1,772. A breach of the last will trigger a fresh sell-off toward the $1,750 psychological level.  

However, the bullish 14-day Relative Strength Index (RSI) could offer some reprieve to Gold buyers.

On the upside, recapturing the $1,810 barrier will call for a retest of the previous day’s high at $1,814. Further up, Gold bulls will target the wedge resistance at $1,825, where the multi-month high aligns.