Fundamental analysis of XAU/USD

Gold prices are down slightly on Friday, despite rising more than 1% in the previous session. However, the precious metals market retains upside potential, amid a possible pause in interest rate hikes by the U.S. Central Bank.

Like many other assets, gold is in a limited range as market participants are cautious ahead of the Fed's key rate decision. Today's slight decline is clearly a correction after Thursday's sharp price change. A weaker dollar has also played a role in boosting real-sector sales, as a weak dollar makes gold less expensive for overseas buyers. The dollar index remains close to Thursday's lows, which helps support the yellow metal.

U.S. CPI report will give clarity

Next, the market's attention shifts to the U.S. consumer inflation report for May, which is scheduled for publication on June 13, the eve of the Fed meeting. This report will bring more clarity to the US economy. At the same time, the International Monetary Fund (IMF) urged the U.S. Federal Reserve and other global financial regulators to conduct an aggressive monetary policy to fight inflation.

Traders are betting on a pause in June and a rate hike in July

Despite the recent decline, the overall trend in gold remains positive and prices are looking forward to a new push to resume the upward movement. The market currently estimates a 76% probability of the Fed keeping interest rates unchanged at the upcoming meeting, given that rates have been rising regularly since March 2022. However, the probability of a 25 basis point hike in July is 51%.

Trading scenarios:

Support levels: 1931.30, 1941.30, 1954.60, 1958.75.

Resistance levels: 1976.45, 1985.90, 1996.50, 2005.90.

Main scenario: Buy

Taking into account the current positive dynamics of gold and the expectation of the Fed's interest rates remaining unchanged, the main scenario suggests buying. If the XAU/USD price overcomes the resistance level of 1976.45, it can be a signal to buy. In this case, the target level for profit taking would be the next resistance level at 1985.90. The level for fixing losses (stop loss) can be set at 1958.75, which is the lower support level.

Alternative scenario: Sell

An alternative scenario would be to sell if the XAU/USD falls below the support at 1958.75. This could indicate a possible weakening of the trend. In this case, the target level for profit taking would be the next support level at 1954.60. A stop loss level can be set at 1976.45, which is the upper resistance level.