- Gold capitalized on safe-haven flows and set a new record high above $3,000.
- The Fed’s policy announcements and the revised dot plot could influence Gold’s valuation.
- The near-term technical outlook suggests that the bullish bias remains intact.
Following a bearish opening to the week, Gold (XAU) reversed its direction and climbed to a new record high above $3,000 on Friday. Markets will take a break from politics and focus on the Federal Reserve’s (Fed) policy decisions.
Gold rebounds from below $2,900 on broad USD weakness
Gold started the week under bearish pressure and closed in negative territory on Monday. The risk-averse market atmosphere amid growing concerns over an economic downturn in the US and deepening global trade conflicts allowed risk-averse flows to dominate the action in financial markets in the first half of the week, helping XAU/USD regain its traction.
When asked whether his policies could weigh on economic activity in an interview over the weekend, United States (US) President Donald Trump acknowledged that there will be a “period of transition.” Wall Street’s main indexes suffered heavy losses on Monday. On Tuesday, markets experienced heightened volatility while assessing the latest headlines surrounding the Trump administration’s trade policy.
Trump announced on Tuesday that he would impose an additional 25% tariff, on top of the previously announced 25%, on steel and aluminum imports from Canada. In response, Ontario Premier Doug Ford said that they would place a 25% surcharge on the electricity they supply to more than one million homes in the US. Trump backed off following this development and the White House said that only the previously planned 25% tariffs on steel and aluminum products from Canada and all other countries would go into effect on Wednesday, with no exceptions or exemptions.
Early Wednesday, European Commission President Ursula von der Leyen said that the European Union (EU) had launched “swift and proportionate countermeasures” on US imports in response to steel tariffs. Similarly, UK Trade Minister Jonathan Reynolds said that it is disappointing that the US has decided to go ahead with global tariffs on steel and aluminum, adding that they will keep all options on the table and won’t hesitate to respond in the national interest. Heightened fears over a trade war involving many nations helped Gold find demand as a safe haven midweek.
Meanwhile, the US Bureau of Labor Statistics reported on Wednesday that annual inflation in the US, as measured by the change in the Consumer Price Index (CPI), softened to 2.8% in February from 3% in January. The core CPI, which excludes volatile food and energy prices, rose 3.1% on a yearly basis. This print followed the 3.3% increase recorded in January and came in below analysts’ estimate of 3.2%. On a monthly basis, the core CPI rose 0.2%. These prints failed to trigger a noticeable market reaction and Gold continued to push higher above $2,900.
After breaking above the previous record-high of $2,956 late Thursday, Gold attracted technical buyers and climbed above $3,000 on Friday. Additionally, market chatter about the People’s Bank of China (PBoC) looking to cut the reserve requirement ratio (RRR) by either 25 or 50 basis points (bps) helped the precious metal extend its rally.
Gold investors await Fed decision, revised economic outlook and Powell’s comments
The Federal Reserve will announce its monetary policy decisions and publish the revised Summary of Economic Projections (SEP), also known as the dot plot, following its two-day meeting on Wednesday.
According to the CME FedWatch Tool, markets virtually see no chance of a rate cut in March. Hence, investors will scrutinize the policy statement, the dot plot and pay close attention to comments from Chairman Jerome Powell in the post-meeting press conference.
In December, the dot plot showed that policymakers were projecting a total of 50 basis point (bps) reduction in the policy rate in 2025 while forecasting an annual Gross Domestic Product (GDP) growth of 2.1% and seeing an annual Personal Consumption Expenditure (PCE) inflation of 2.5% at year-end. In case the revised SEP shows no change in the interest rate projections but highlights a downward revision to growth expectations, the immediate reaction could trigger a US Dollar (USD) selloff and help XAU/USD push higher. On the flip side, an upward revision to inflation forecasts, without a noticeable change in the GDP estimates, could support the USD and cause the Gold price to turn south.
Any changes to interest rate projections, regardless of the GDP and inflation forecasts, could influence the USD’s valuation significantly. If policymakers lean toward three 25 bps rate cuts in the remainder of the year, the USD could come under heavy bearish pressure. Conversely, the USD could stage a decisive rebound and open the door for a deep downward correction in XAU/USD in case the majority of officials put down only one rate cut in 2025.
Powell’s comments could also drive Gold’s valuation. If he downplays concerns over an economic downturn and puts more emphasis on the uncertainty surrounding the inflation outlook, citing Trump’s administration’s tariffs, the USD is likely to outperform its rivals in the near term.
Gold technical analysis
Gold remains within a three-month-old ascending regression channel and the Relative Strength Index (RSI) indicator on the daily chart stays near 70, suggesting that the bullish bias remains intact.
Once Gold stabilizes above $3,000 (round level, mid-point of the ascending channel) and confirms this level as support, $3,060 (upper limit of the ascending channel) could be set as the next bullish target before $3,100 (round level). However, technical buyers could be discouraged if XAU/USD fails to flip $3,000 into support. In this scenario, $2,920 (20-day Simple Moving Average, lower limit of the ascending channel) and $2,900 (round level, static level) could be seen as the next support levels.
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.
