Gold rebounds as traders position for Fed interest rate decision
- Gold regains ground as traders trim bearish positions ahead of the Federal Reserve interest rate decision.
- The Fed is widely expected to deliver its first rate hike since July 2023.
- XAU/USD trades in a neutral technical setup, supported by the 50-day and 100-day SMAs, while the 200-day SMA caps the upside.
Gold (XAU/USD) rebounds on Wednesday as sellers trim their exposure ahead of the Federal Reserve’s (Fed) monetary policy announcement. A modest pullback in US Treasury yields and a steady US Dollar (USD) also help the precious metal recover from its lowest level in over a month, touched earlier this week. At the time of writing, XAU/USD trades around $4,350, up 1.30% on the day.
The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, holds near two-week highs around 99.65, little changed on the day. The benchmark 10-year US Treasury yield stands near 4.99% after hitting 5.04% on Tuesday, its highest level since 2007.
The US central bank will announce its decision at 18:00 GMT, followed by Fed Chairman Kevin Warsh’s press conference at 18:30 GMT. Markets widely expect a 25 basis-point rate hike, taking the federal funds target range to 3.75%-4.00%. If delivered, it would be the Fed’s first interest-rate increase since July 2023.
The anticipated rate increase reflects growing inflation risks from the energy shock caused by the war in the Middle East. With the United States and Iran still far from reaching a resolution and Oil prices holding at elevated levels, the Fed’s task of returning inflation to its 2% target has become more difficult. At the same time, the US labour market appears stable after a strong August employment report, giving policymakers more room to tighten policy.
Strategists at ING expect the Fed to deliver what they describe as a “consensus 25bp” rate increase “to 4.0% today,” noting that “markets are pricing in 23bp for today, 52bp by year-end, and 89bp by June.” They caution that “a surprise hold would likely deliver a big blow to the Dollar: both through the dovish repricing in front-end rates and a likely selloff in the back end.”
In their view, this risk profile “also argues for a hawkish message,” as “a dovish hike may not be enough to convey the monetary policy discipline bond investors currently demand, particularly given the amount of tightening already priced into swaps.”
Higher borrowing costs are usually negative for Gold because they increase the appeal of interest-bearing assets such as government bonds. However, with a quarter-point increase almost fully priced in, the metal’s reaction is likely to depend more on the updated Summary of Economic Projections, including the dot plot, and Warsh’s post-meeting remarks.
A hawkish Fed signal pointing to more rate increases could weigh on Gold. However, if the Fed avoids committing to another rate hike, the metal could build on its recovery.
Technical Analysis: 200-day SMA remains key barrier for XAU/USD bulls
On the daily chart, XAU/USD sits in a mid-range configuration, holding above the 50-day Simple Moving Average (SMA) and the 100-day SMA, yet remaining capped well below the 200-day SMA around $4,540. This alignment suggests a neutral-to-capped bias, with price supported by medium-term averages but still below the broader downtrend marker. The Relative Strength Index (RSI) at 48 underscores a flat momentum profile, while the Moving Average Convergence Divergence (MACD) histogram remains in negative territory, hinting that upside attempts could struggle while the 200-day SMA stays overhead.
On the downside, initial support is seen at the 100-day SMA around $4,326, followed by the 50-day SMA near $4,280, with more robust demand expected at the horizontal levels of $4,150 and then $4,000 if selling pressure accelerates.
On the topside, the first significant resistance comes at the 200-day SMA around $4,540, and a break above this barrier would expose the next key cap at the horizontal resistance zone near $4,700.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Gold FAQs
Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.
Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.
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