Gold Sets at One-Month Lows, Traders Remain Cautious Ahead of FOMC

• The price of gold has recovered slightly from the one-month low reached on Tuesday.
• Aggressive bets on the Federal Reserve rate hike supported the dollar and limited any significant rise.
• Recession fears extended some support ahead of Wednesday’s crucial FOMC decision.

The price of gold attracted some buying near the $1,810 region, or a one-month low set earlier on Tuesday, though it struggled to capitalize on the rally attempt. XAUUSD wavered between tepid gains and small losses in the North American session, and was last seen in neutral territory just below the $1,820 level.

Gold price affected by Fed rate hike bets

Investors appear convinced that the Federal Reserve will be more aggressive in combating persistent inflation, which hit a four-decade high in May. Indeed, markets are pricing in a 175 basis point tightening over the next three meetings, implying at least a 75 basis point rate hike for the September meeting. In addition, investors now expect officials to hike rates to nearly 4% next spring, up from last month’s forecast of a high of around 3%, which, in turn, acted as a wind against for gold without performance.

Dollar bullish trend further weakened XAU/USD

The US dollar quickly reversed modest intraday losses and held close to two-decade highs hit the day before, amid soaring US Treasury yields. This was another factor that prevented a significant rise in dollar-denominated commodities. Expectations that the US central bank will tighten monetary policy at a faster pace pushed US government bond yields to their highest levels in more than a decade on Monday. This, in turn, continued to lend some support to the dollar.

dollar and gold

Gloomy economic outlook helped limit losses

The prospect of more aggressive monetary policy tightening by the Fed and other major central banks has reignited fears of a global recession. Apart from this, concerns about supply chain disruptions caused by the Russian-Ukrainian war and the latest outbreak of COVID-19 in China limited initial optimism in equity markets. This, in turn, was seen as the only factor that helped limit deeper gold price losses, at least for the time being.

Attention remains focused on the FOMC

Market participants are eagerly awaiting the outcome of the FOMC’s two-day monetary policy meeting, to be announced during the US session on Wednesday. A 75 basis point rally would be the biggest since 1994 and would send a huge shock across all asset classes. This should be enough to give the dollar a further boost and put downward pressure on XAUUSD. However, traders seemed reluctant to place aggressive bets, preferring to wait on the sidelines given the risk of a key central bank event.

According to Yohay Elam, Principal Analyst at FXStreet: “A ‘buy the dip’ in equities has now become one for the US dollar. The Fed’s June 15 decision will likely include several twists, and I think the dollar would be able to digest all the movements and get away with it.”

Gold Price Technical Outlook

Gold price appears to have found acceptance below a technically significant 200-day SMA and looks vulnerable to weakening further. The negative outlook is reinforced by the fact that the oscillators on the daily chart remain deep in bearish territory and are still far from oversold. Follow-up selling below the daily swing low around the $1,810 area will reaffirm the bearish bias and drag XAUUSD further below the $1,800 mark. The bears could try to test the May monthly low around the $1,786 zone, followed closely by the previous year’s low near the $1,780 zone.

On the other hand, the $1,831 to $1,832 area seems to act as immediate resistance ahead of the $1,842 area (200 DMA). Sustained strength beyond that could trigger a short-covering rally towards the $1,870 offer zone. Follow-up buying above the monthly high, around the $1,879 area, would change the bias in favor of the bulls and set the stage for a recovery to the $1,900 round figure.