XAU/USD Directional Bias Tied to Fed Monetary Policy Posture

GOLD PRICE OUTLOOK: SLIGHTLY BULLISH

• Gold prices declined this week, but the Fed could spark a bullish reversal soon
• The FOMC is expected to raise interest rates by 75 basis points at its November meeting, but it could adopt a less hawkish stance in terms of future hiking
• The U.S. central bank tightening bias is likely to set the trading tone for precious metals in the near term.

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Gold prices declined this week despite a weaker U.S. dollar and lower U.S. Treasury yields, as a rally in risk assets prompted traders to avoid defensive positions. While the precious metal has been in a downtrend over the past few months, the Federal Reserve could soon ignite the flames of recovery.

The FOMC is expected to deliver the fourth consecutive 75 basis point hike at its November meeting next week, but this adjustment has been already discounted, so what matters now for the market is what policymakers signal about the future.

Although a pivot towards a rate-cutting regime is unlikely to arrive soon because inflation continues to be elevated, there are signs that the central bank could adopt a less hawkish stance, slowing the pace of interest rate increases in their effort to engineer a softish-landing.

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It is true that activity has remained resilient, as reflected in the third-quarter gross domestic product report, but demand is clearly downshifting. That said, some Fed officials believe that the fast and furious tightening cycle initiated this year could do a lot of damage once it plays out fully in the real economy, so they are trying to be more cautious and data dependent.

With peak hawkishness possibly in the rearview mirror amid growing economic headwinds for 2023, bond rates could begin to correct lower or at least stop rising vigorously as they have over the course of the year, paving the way for the U.S. dollar and, more importantly, real yields to trend lower. This scenario could be positive for rate-sensitive non-yielding assets such as gold and silver.

In terms of technical analysis, bullion has resumed its decline after failing to clear resistance in the $1,675 area, with support now sitting at $1,615. If bears manage to breach this floor, we could see a move towards $1570. On the flip side, if buyers return and spark a bullish reversal, the first hurdle comes in at $1,675. If this barrier is taken out decisively, buyers could launch an attack on $1,725.

GOLD PRICE TECHNICAL CHART

Gold Prices Chart Prepared Using TradingView

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—Written by Diego Colman, Market Strategist for DailyFX