- Gold benefitted from escalating geopolitical tensions and climbed to a new record high above $3,050.
- The Fed’s cautious outlook on policy easing caused XAU/USD to correct lower.
- The technical outlook suggests that the bullish bias remains intact in the short term.
Gold (XAU/USD) corrected lower but managed to stabilize to end the week comfortably above $3,000 after notching a new record peak above $3,050 on Thursday. Comments from Federal Reserve (Fed) officials and February inflation data from the United States (US) will be scrutinized by market participants next week.
Gold pulls away after setting fresh record-high
Following a quiet beginning to the week, Gold benefited from escalating geopolitical tensions and climbed above $3,030 on Tuesday. Israeli Prime Minister Benjamin Netanyahu's office stated early Tuesday that Israel will resume military operations against Hamas across the Gaza Strip, noting that they will act against Hamas with an increasing military force. Meanwhile, US President Donald Trump said that they will hold Iran responsible for any attacks carried out by the Houthis after the group launched an attack comprising 18 ballistic and cruise missiles, as well as drones, targeting the USS Harry S Truman aircraft carrier over the weekend.
The Federal Reserve (Fed) announced on Wednesday that it left the policy rate unchanged at the 4.25%-4.5% range after the March meeting. The revised Summary of Projections (SEP), the so-called dot-plot, showed that policymakers are still projecting a 50 basis point (bps) reduction in interest rates in 2025. Additionally, the Gross Domestic Product (GDP) growth forecast for this year was revised lower to 1.7% from 2.1% in December's SEP.
In the post-meeting press conference, Fed Chairman Jerome Powell reiterated that the central bank will not be in a hurry to move on rate cuts, adding that they can maintain policy restraint for longer if the economy remains strong. After climbing to yet another all-time peak above $3,050 during the Asian trading hours on Thursday, XAU/USD corrected lower in the second half of the day as the Fed’s cautious tone on policy easing and upbeat data releases from the US supported the US Dollar (USD).
The US Department of Labor reported on Thursday that there were 223,000 Initial Jobless Claims in the week ending March 15, below the market expectation of 224,000. Other data from the US showed that Existing Home Sales increased by 4.2% in February, following January's 4.7% decline, and the Philadelphia Fed Manufacturing Index came in at 12.5 in March, surpassing analysts' estimate of 8.5.
Gold extended its correction on Friday as the USD preserved its strength in the absence of high-impact data releases.
Gold investors await inflation data, comments from Fed officials
S&P Global will release preliminary Manufacturing and Services Purchasing Managers Index (PMI) data for March on Monday. In case either of these PMIs comes in below 50 and points to a contraction in the business activity, investors could see that as a sign of a worsening economic outlook. In this scenario, the US Dollar could come under pressure in the near term and allow XAU/USD to stretch higher.
On Thursday, the US Bureau of Economic Analysis (BEA) will publish the final version of the Gross Domestic Product (GDP) growth data for the fourth quarter of 2024. Unless there is a noticeable revision in either direction, investors are likely to ignore this data.
The Personal Consumption Expenditures (PCE) Price Index data, the Fed’s preferred gauge of inflation, will be featured in the US economic calendar on Friday. A stronger-than-forecast reading in the monthly core PCE Price Index, which excludes volatile food and energy prices, could support the USD with the immediate reaction and cause XAU/USD to turn south heading into the weekend. Conversely, a soft print could ease concerns over inflation remaining sticky and help the Gold hold its ground.
Market participants will also pay close attention to comments from Fed officials throughout the week. According to the CME FedWatch Tool, markets are currently pricing in a less than 20% probability of a 25 bps rate cut in May. In case policymakers leave the door open for a rate cut at the next meeting, the USD could lose its strength. In this scenario, US Treasury bond yields are likely to push south and pave the way for a leg higher in Gold prices.
Gold technical analysis
The Relative Strength Index (RSI) indicator on the daily chart retreated slightly below 70 on Friday, suggesting that the latest pullback is a technical correction rather than the beginning of a bearish reversal. Additionally, Gold remains within a three-month-old ascending regression channel.
In case Gold confirms $3,030 (mid-point of the ascending channel) as resistance, it could extend its correction toward $3,000 (round level). A daily close below this latter support could attract technical sellers and open the door for additional losses toward $2,960-$2,950 (lower limit of the ascending channel, 20-day Simple Moving Average).
On the upside, an interim resistance seems to have formed at $3,050 (static level). If XAU/USD stabilizes above this level, $3,100 (upper limit of the ascending channel, psychological level) could be set as the next bullish target.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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