After rising more than 3.5% in the previous week, Gold (XAU/USD) has entered a consolidation phase and fluctuated at around $4,200. The Federal Reserve’s (Fed) interest rate decision and revised Summary of Economic Projections (SEP), also known as the dot plot, could trigger the next directional move in XAU/USD.
Gold stabilizes on persistent USD weakness
Gold edged higher to start the week but lost its bullish momentum as the positive shift seen in risk mood, reflected by the bullish opening in Wall Street on Monday, caused safe-haven demand to recede.
Although XAU/USD closed in negative territory on Tuesday, it managed to stabilize above $4,200 as the US Dollar (USD) remained under bearish pressure on growing expectations that the Fed will cut interest rates further.
US President Donald Trump hinted on Tuesday that he wants to nominate his chief economic adviser Kevin Hassett, who is widely seen as someone who would advocate for a loose monetary policy, to replace outgoing Fed Chairman Jerome Powell next year.
On Wednesday, the data published by the Automatic Data Processing (ADP) showed that private employers shed 32,000 jobs in November. This reading came in worse than the market expectation for an increase of 5,000 and made it difficult for the USD to shake off the bearish pressure. Additionally, the Institute for Supply Management’s (ISM) Services Purchasing Managers’ Index survey showed that the Employment Index was 48.9 in November, pointing to an ongoing contraction in the service sector’s payrolls.
While some upbeat data releases supported the USD on Thursday, they had little to no impact on market pricing of a 25 basis points (bps) Fed rate cut on December 10. In turn, XAU/USD recovered back above $4,200 following a dip toward $4,170 in the early American session.
Challenger, Gray & Christmas’ monthly publication showed that planned job cuts declined 53% from October to 71,321 in November. Furthermore, the US Department of Labor (DoL) reported that the number of first-time applications for unemployment benefits declined to 191,000 from 218,000 in the previous week, marking the lowest print in over three years and coming in better than the market expectation of 220,000. Still, markets took the Jobless Claims data with a pinch of salt due to the usual distortions around the Thanksgiving holiday.
Gold traders to focus on Fed meeting
According to the CME FedWatch Tool, markets are currently seeing about a 90% probability of a 25 bps Fed rate cut. Hence, the decision to lower the policy rate might not trigger a market reaction by itself.
In case the Fed unexpectedly leaves the rate unchanged, the USD is likely to gather strength in the immediate aftermath and open the door for a sharp decline in XAU/USD. If the Fed opts to cut the interest rate by 25 bps, the move in Gold will largely depend on what the dot plot shows.
If the revised SEP shows policymakers projecting a 50 bps, or less, reduction in rates next year, Gold could come under bearish pressure. Conversely, a 25 bps cut, combined with a rate cut projection of 75 bps, or more, in 2026, could reaffirm the market expectations for a loose policy stance and open the door for a leg lower in the USD. In this scenario, XAU/USD could turn north in the near term.
Investors will also pay close attention to comments from Fed Chair Jerome Powell in the post-meeting press conference. Powell is likely to be asked about his view on his potential replacement Kevin Hassett. In all probability, he will refrain from commenting on the matter. However, if he warns against an aggressive loosening in policy, citing inflation risks, markets could see this as a hawkish tone. On the other hand, the USD could continue to weaken if Powell voices growing concerns over the labor market outlook, while adopting a more optimistic tone about inflation dynamics.
Ahead of the Fed event, the US Bureau of Labor Statistics will publish the JOLTS Job Openings data for October, which is likely to be largely ignored by market participants.
Gold technical analysis
The technical outlook points to a bullish stance in the near term as Gold holds comfortably above the 20-day Simple Moving Average (SMA), while the Relative Strength Index (RSI) indicator on the daily chart remains above 60. Additionally, XAU/USD continues to fluctuate within a three-month-old ascending regression channel.
On the upside, $4,300-$4,315 (round level, mid-point of the ascending channel) aligns as the first resistance area before $4,380 (all-time high). Looking south, support levels could be spotted at $4,150-$4,130 (20-day SMA, Fibonacci 23.6% retracement), $4,077-$4,070 (50-day SMA, lower limit of the ascending channel) and $3,975 (Fibonacci 38.2% retracement).
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
