All Eyes are on the Fed as the XAU/USD Hovers Around $1,925

EnclaveFX Ltd
Feb 01, 2023
  • On Wednesday, the gold price edged lower, but the downside is likely to remain limited.
  • As risk sentiment softens, a modest decline in the US Dollar could support the XAU/USD pair.
  • Markets remain focused on the decision of the Federal Open Market Committee (FOMC).

Gold price struggles to capitalize on the overnight goodish rebound from the $1,900 mark, or a nearly two-week low, and edges lower on Wednesday. XAU/USD is currently trading just below $1,925 during the first half of the European session. Despite this, the downside appears cushioned, at least for now, as traders may refrain from placing aggressive directional bets ahead of key central bank events.

Gold price draws support from the weaker US Dollar

At the end of a two-day policy meeting later today, the Federal Reserve (Fed) will announce its decision, widely expected to further slow the rate-hiking cycle. Due to signs of easing inflationary pressures in the United States (US), the CME's FedWatch Tool indicates that a smaller 25 basis points (bps) rate hike is highly likely. As a result of Tuesday's release of the US wage growth data, which showed that labor costs increased less than expected during the fourth quarter, the bets were reaffirmed. Consequently, the yields on US Treasury bonds are falling again, and the US Dollar continues to suffer. A weaker Dollar could provide a tailwind for gold that is denominated in US Dollars.

Gold prices are expected to be capped by a hawkish Federal Reserve

The Fed appears more likely to maintain a hawkish stance for a longer period of time, however, as recent US macro data indicate a resilient economy. Furthermore, Fed officials have consistently emphasized the need to keep interest rates high for a long time in order to reduce inflation. In light of this, the market will be focused on Jerome Powell's remarks at the following post-meeting press conference as well as the accompanying monetary policy statement. The USD and the non-yielding Gold price will be influenced by the Fed's future rate hike path, which will determine the near-term trajectory for investors. Meanwhile, the cautious market mood may help limit losses for the safe-haven XAU/USD.

A look at macro data from the United States may provide some impetus

During the US economic calendar week, participants will see the release of the ADP report on private-sector employment, ISM Manufacturing PMI, and JOLTS Job Openings. Combined with the US bond yields, this could create short-term opportunities around gold prices during the early North American session, driving USD demand. It is more likely, however, that the immediate response to the US macro data will fizzle out quickly, supporting prospects for an extension of the range-bound price action intraday.


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