Gold Price Forecast: Dovish Fed Hike Spurs Recovery In XAU/USD

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  • Gold bulls drive the price back up after Federal Reserve signals less future rate hikes likely.
  • Federal Reserve Chairman Powell highlights banking risks, suggesting these may do the work of tightening for the Fed. 
  • US Dollar weakens on the news, and negatively correlated Gold rises. 

Gold price shot higher after the March FOMC meeting on Wednesday, reaching a peak of $1,978, close to where it still trades on Thursday at the start of the European Session. The ore beloved of king Midas of Phrygia rose after the US Federal Reserve (Fed) suggested tighter credit conditions due to banking stress might do the job of bringing down inflation on its behalf and that it would, therefore, probably not have to raise rates as much as expected in the future. 

Gold rose because the expectations of lower interest rates are viewed as bullish for the metal since it doesn’t yield holders a return unlike cash (deposits) or cash equivalents.  

Gold news: Dovish hike from the Fed

At its FOMC meeting on Wednesday, March 22, the US Federal Reserve increased the Fed Funds Rate a quarter of a percent to a target range of 4.75%-5.00%, in line with market expectations, raising the base interest rate at which banks lend to each other. 

Whilst this would have normally been expected to be bearish for the Gold price, it had already been priced in by markets as a base case scenario. 

The Fed’s Summary of Economic Projections (SEP), published at the same time as the decision, however, showed a lower-than-previous future rate hike trajectory in the dot plot. The Fed now forecasts a terminal rate of only 5.10%, just above the current range, and it was this that began pushing the Gold prices higher.

In addition, the Chairman of the Federal Reserve, Jerome Powell, stated in the press conference after the meeting that it was possible the Fed might not need to raise rates as much as expected because the credit crunch caused by the banking crisis would do the work for them. This further drove Gold higher.

"Possible tightening in credit conditions may mean monetary tightening has less work to do," said Powell.

US Dollar falls under the weight of Powell’s statements

The US Dollar, which has an inverse relationship to Gold price, fell after the Fed meeting since the expectation of lower interest rates tends to be negative for the currency. 

The Dollar Index, which measures the value of the USD against a weighted basket of counterparts fell 0.14% on Wednesday to close at 101.97. 

Gold is priced in Dollars on international markets, so a weaker US Dollar buys less Gold and vice-versa for a stronger USD, all other things being equal. 

Gold price technical analysis: The trend is the bulls’ friend

The gold price has recovered and risen back up in line with the dominant short-term uptrend, shown clearly on the 4-hour chart below. 

Since ‘the trend is your friend’, as the saying goes, the probabilities support a continuation higher, with a break above the $1,984 highs of the previous bar signaling an extension higher. 

The underside of the just-broken trendline is likely to present an initial target and resistance at $1,991 and the Gold price will probably pullback at that level, however, an eventual rally all the way to the yearly highs at $2,009 is quite possible. 

The Relative Strength Index (RSI) is mirroring price action, supporting the recovery.

(Click on image to enlarge)

Gold price: 4-hour Chart

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