- The price of gold is rising in consolidation and towards recent bull cycle highs.
- The price of gold will now depend on future key economic events in the United States.
- The Federal Reserve is looming and all will be revealed in early February.
The price of gold was a touch higher at the start of the week, digging into shorts that got into the prospect of a move into longs that had built up towards the end of last week’s trading. XAU/USD rallied from the technical support area around the psychological level of $1,900 and fell to $1,930 on the assumption that the Federal Reserve will slow the pace of rate hikes.
US dollar index DXY took a tumble in recent trade as the opening balance for the week fell into the dollar, sinking it towards the death zone on the charts and taking over last week’s support area at 101.70s. This move increases the price of gold, making it cheaper for holders of other currencies. Lower yields on US Treasuries tend to steer investors towards the zero-yielding yellow metal.
Federal Reserve Expectations
There are mixed feelings surrounding the Federal Reserve. World interest rate probabilities, WIRP, suggest that the Federal Reserve’s 25bp hike on February 1 is fully factored in, with less than a 10% chance of a bigger 50bp move. Another 25bp hike on March 22 is almost priced in, while the last 25bp hike in the second quarter, Q2, is only about 30% priced in
However, analysts at ANZ Bank recently wrote a note titled “Fed tightening is not done yet.”
”In early 2023, data released from the US indicated a slight easing of inflationary pressures and softer demand. This suggests that last year’s aggressive Fed tightening is starting to take effect,” the analysts explained. ”Weakness in housing is evident (existing home sales fell 17.8% last year), manufacturing activity has slowed and retail sales are trending back.”
”That’s exactly what the Fed wants as it tries to keep inflation back on target. But it’s early and the Fed has yet to declare victory on inflation,” analysts reminded readers.
”However, the Federal Open Market Committee is entering a more subtle phase of the tightening cycle. The lagged effects of last year’s policy tightening are still being felt, and there is no widespread evidence yet that the labor market is weakening significantly.
”Highly visible layoffs at some large technology and financial firms are making headlines, but the layoffs are global and initial U.S. claims data do not suggest that demand for labor is easing. We think the Fed will continue to emphasize labor market tightness in its thinking and err on the side of further tightening. We expect a rate hike of 25 basis points at the next meeting and will indicate that rates will need to rise further.”
Meanwhile, analysts at Brown Brothers Harriman also believe the market is underestimating the potential for a longer-term Federal Reserve rate hike. ”Core Personal Consumption Expenditures, PCE, are largely in the 4.5-5.5% range from November 2021,” they said. ”We think Fed needs to see more improvement before even considering some kind of pivot.”
So when we consider the prospects for a retracement along the curve and compare it to recent price action and historical structures as well as support/resistance areas on the timeline, it would be wise to anticipate a corrective bias and start planning as a trading opportunity as illustrated by the charts below.
Technical analysis of gold price
At the beginning of the weekly analysis before the opening Gold, Chart of the Week: XAU/USD Capturing Eager for Significant Compression Ahead of Key Hot Eventsit was noted that “the price of gold rose after the highs of June 2022 and November 2021, prompting breakout traders, and those with wide stops remain in the money until the old price disequilibrium (OPI).”
Weekly gold price chart
Further, it appeared that the gold price’s major resistance (MR) could now be in play according to the weekly Doji that was left at the end of last week. The 38.2% Fibonacci retracement level with the price of gold around $1,878 could be an attractive pullback area that coincides with the price imbalance (PI) below, as well as a reasonable area to place stops that were pulled higher by those who aiming for a breakthrough above. $1,870.”
Looking ahead, the price of gold must fall below the current trendline support. The main price support for gold (MS) is near $1,820 and $1,770. This meets the Fibonacci retracement of 78.6% of the gold price.
If all of this were to play out in the coming weeks, the previous break of the gold price structure (BoS) around $1,670 could come back under pressure to protect against a major downside correction in the gold price.
Gold Price Chart H1
Meanwhile, in terms of current market action in the price of gold, pre-market analysis noted the prospect of a higher opening balance for the week as part of a consolidation phase as follows: