Gold suffers a setback after an impressive performance earlier in the week, with XAU/USD prices declining by approximately 0.5% to $1,967. This decline was primarily influenced by the surge in U.S. Treasury yields, particularly at the front end of the yield curve. The Department of Labor’s report revealing an unexpected decline in Americans filing for unemployment benefits bolstered U.S. Treasury yields, signifying the resilience of the U.S. labor market. The better-than-expected economic figures fueled speculation that the Federal Reserve would intensify its efforts to combat inflation by tightening monetary policy further.

The surge in U.S. yields also led to a strengthening U.S. dollar, as traders anticipated a more hawkish stance from the Federal Reserve. A stronger dollar often exerts downward pressure on precious metals like gold, making them comparatively more expensive for investors using other currencies. The combination of surging U.S. yields and a stronger dollar acted as headwinds for gold prices, pushing them lower.

Gold suffers from surging U.S. yields and dollar strength. Key technical levels to watch ahead of FOMC meeting

Market participants are closely eyeing the upcoming Federal Open Market Committee (FOMC) meeting, where the central bank is widely expected to raise its key benchmark rate by 25 basis points to a range of 5.25% to 5.50%. This rate hike has already been factored into the market, but the focus will be on the Federal Reserve’s outlook for the future.

If the Federal Reserve maintains a hawkish stance and signals support for additional tightening measures, gold could face further pressure. Higher interest rates tend to diminish the attractiveness of non-yielding assets like gold, leading investors to seek higher returns in other assets. Consequently, the demand for precious metals could decline. Traders will closely scrutinize the Fed’s communication during the meeting, particularly its projections for the terminal rate. Any indication of a more aggressive rate hike path could create a hostile environment for precious metals, including gold.

Technical Analysis for XAU/USD

From a technical perspective, gold’s rebound earlier in the week was halted by strong resistance at approximately $1,985. This resistance level has proven to be a formidable barrier to advances in previous months. After the rejection, XAU/USD initiated a pullback towards the trendline support around $1,965, as evident from the 4-hour chart.

Should gold prices manage to find support around these levels and resume their upward trajectory, there is potential for a bullish reversal. Initial resistance is expected around $1,973 and $1,985, which were the previous barriers. Breaking above this resistance zone could reignite upward momentum and pave the way for a rally towards the psychological $2,000 mark. Notably, this level also aligns with the 61.8% Fibonacci retracement level of the May/June selloff, making it a critical level to watch.

Conversely, a breakdown below the trendline support at $1,965 may reinforce bearish pressure, opening the path towards further declines. In this scenario, the next significant support levels to monitor are approximately $1,945 and $1,935.

Outlook for Precious Metals

The outlook for precious metals, particularly gold, is heavily dependent on the Federal Reserve’s policy decisions and guidance. As the market eagerly awaits the outcome of the FOMC meeting, any signal of a more aggressive tightening stance from the central bank could lead to continued pressure on gold prices.

However, if the Federal Reserve adopts a more cautious tone and indicates a gradual approach to rate hikes, gold may find some relief. Historically, precious metals, particularly gold, have served as safe-haven assets during times of economic uncertainty and market volatility. Therefore, any indication of a more prolonged accommodative monetary policy from the Federal Reserve could reignite demand for gold as investors seek protection against inflation and potential economic challenges.

Conclusion

Gold prices experienced headwinds due to surging U.S. yields and a stronger U.S. dollar, leading to a setback following a strong performance earlier in the week. The upcoming FOMC meeting holds significant importance for gold’s future trajectory, as market participants closely analyze the Federal Reserve’s stance on interest rates and its potential impact on precious metals. Technical analysis indicates crucial levels to watch for XAU/USD, with possibilities for both bullish and bearish scenarios. Traders should diligently observe the Fed’s communication for vital insights into the future of gold prices amid evolving economic conditions and global market dynamics.

Click here to read our latest article on the GBP/USD Price Forecast