Gold has been holding steady at the $2,630 mark, but it faces resistance as traders await the Federal Reserve’s upcoming decision. Many are anticipating a "hawkish cut" from the Fed, which could strengthen the U.S. dollar and place additional pressure on gold prices. Despite some attempts to rise, the price of gold remains constrained below the $2,665 threshold.
On Wednesday, the XAU/USD was mostly unchanged after recovering from a dip it took earlier in the week. Traders are on edge as they wait for the final Federal Reserve meeting of the year to unveil its decisions. It’s widely expected that the Fed will reduce interest rates by a quarter of a point. However, there are signals that the Fed might maintain a hawkish stance in its future guidance. Recent economic indicators from the U.S. suggest that consumer activity is thriving, and inflation remains a concern. Furthermore, incoming policies from President-elect Donald Trump may add to these inflationary pressures.
This scenario has led many investors to temper their expectations regarding monetary easing. Consequently, U.S. Treasury yields have seen a significant increase, which has not been favorable for gold.
Gold Under Pressure Due to Potential Hawkish Stance by the Fed
The retail sales report released on Tuesday showed a 0.7% increase for November, which is an improvement over the revised 0.5% increase in October and exceeds the 0.5% that analysts had predicted. Since consumer spending accounts for over 60% of the U.S. GDP, these figures reinforce America’s economic strength in contrast to the slowing global economy. Additionally, earlier U.S. data highlighted a surprise uptick in services activity, indicating strong economic performance in the final quarter of the year. According to the CME Group’s FedWatch Tool, futures markets now almost fully expect a 25 basis points rate cut is imminent, though the likelihood of more than two such cuts in 2025 is less than 30%.
Technical Analysis: XAU/USD Finds Constraints Below $2,665
Gold prices are consolidating near the $2,630 support as the market watches the Fed’s next move. The prevailing bearish trend caps gold’s gains, with $2,665 acting as a ceiling. Observing the broader trend, there’s a possibility of a double top pattern forming around $2,720, suggesting a potential deeper drop. In the short term, immediate support is found at $2,630, with subsequent support in the $2,615-$2,605 range, aligning with lows from late November. Should prices fall further, November’s low of $2,540 could be the next target. On the brighter side, resistance lines up at $2,665 and $2,690.
XAU/USD 4-Hour Chart
Exploring central bank roles reveals their mission to maintain price stability within economies. The balancing act involves preventing both inflation and deflation by adjusting interest rates as needed. Leading central banks like the Fed aim to keep inflation rates near 2%.
A central bank’s core tool for regulating inflation is changing the benchmark policy rate, more commonly known as the interest rate. Announcements regarding this are made at pre-set intervals, explaining why rates are either altered or maintained. This prompts local banks to adjust their own interest rates, impacting savings and loans. This leads to tighter monetary conditions through rate hikes or easier conditions when cuts occur.
Central banks operate independently from political influence, with their board members vetted across various levels before appointment. Some members, termed ‘doves,’ favor looser monetary conditions, even tolerating inflation slightly above 2%, to stimulate economic growth. Others, known as ‘hawks,’ push for higher rates to curb inflation, preferring it stays near or below 2%.
The chairman or president orchestrates these meetings, balancing both hawkish and dovish views. Their speeches, often broadcast live, outline the monetary stance and outlook. Central banks aim to guide policy smoothly without causing major disruptions in markets. Communication with the markets before policy meetings and a blackout period just prior to announcements are critical components of this strategy.
