Market Analysis: XAU/USD hovers around recent highs ahead of FOMC

Gold price (XAU/USD) continues to push to new highs as traders lean in favour of a 50-basis point cut at the FOMC meeting on Wednesday. The anticipation of the fist cut from the Federal Reserve is driving risk appetite, allowing gold to continue attracting new buyers. The softer economic data – which is enabling rate cuts – is also a direct driver of bullishness in gold as the precious metal is seen as a safe haven. Because of this, the combination of lower rates and a slowing economy has become the perfect environment for gold to flourish. 

Gold (XAU/USD) daily chart

Past performance is not a reliable indicator of future results.

This week the focus will be on the FOMC meeting, with the outcome likely having a big impact on gold prices. Markets seem to be leaning in favour of a 50-basis point cut, but the margin is pretty small. Interestingly, the latest data doesn’t necessarily justify a larger rate cut, especially consumer prices. Yes, inflation is slowing, but services inflation remains sticky. At this point, with such a tight split in expectations, we could see some surprise in markets if the FOMC does in fact cut rates 50 basis points.

A key driver of volatility will likely be the commentary from Jerome Powell following the decision, as markets will have to discount additional cuts or price-out some of the current predicted easing. A 25 bps cut with a dovish tone, one where Powell acknowledges the need for further easing but trusts the resilience of the US economy, could see some further risk appetite in markets, seen as especially positive for US equities, and gold. In this case, markets would most likely continue to price in 100bps of cuts by the end of 2024. But would simply push back a 50 bps cut to November or December.  

Meanwhile, the same rate cut with a neutral tone, one that does not give too much away in terms of future guidance, and only sees mild downgrades to the dot plot chart, could see a recovery in the US dollar and yields, weighing on gold. That said, in the longer-term, we could see safe haven demand keep gold supported even as equities fall back, especially if concerns about the Fed being too restrictive creep up again. 

Alternatively, a 50 basis point cut with a dovish tone could spark some concern in markets about the health of the US economy, potentially having a negative effect on equities, but giving gold prices more room to grow. If, however, the tone is neutral, it could give more confidence about the strength of the US economy, allowing equities to strengthen but likely limiting the move higher in gold. 

For now, XAU/USD has started to breach the overbought level in the RSI with the price pulling away from its daily highs. Some resistance going into the FOMC meeting is expected as traders are likely to be conservative with their positions in case the momentum shifts.