Fundamental analysis of XAU/USD
Gold prices (XAU/USD) retreated from recent highs near $2,035 during Friday's London session, reflecting diminishing hopes for prompt rate cuts by the Federal Reserve (Fed). The precious metal faced downward pressure as Fed officials expressed reservations about inflation reaching the 2% target, consequently boosting the allure of the US Dollar.
According to the CME Fedwatch tool, investors anticipate interest rates to hold steady within the 5.25%-5.50% range in the upcoming March and May meetings. The probability of a rate cut in June has slightly dipped below 50% from its previous level of approximately 54%.
The shift in expectations regarding early rate cuts stems from Fed policymakers' insistence on sustained progress in inflation gradually declining to the 2% threshold, coupled with robust labor market conditions. Fed Governor Christopher Waller's recent remarks caution against hastily reducing interest rates following persistent consumer price inflation in January.
Fed policymakers prefer to maintain interest rates between 5.25%-5.50% for further assessment, determining whether January's inflationary data represents a temporary anomaly or a deeper concern. This cautious approach aims to avoid exacerbating upward pressures on consumer prices by precipitously implementing rate cuts.
Moreover, the labor market's resilience, as indicated by declining unemployment claims, and steady yields on 10-year US government bonds supporting the dollar, could hinder significant gains for gold amid prevailing risk-on sentiment. The Eurozone's PMI data, signaling a moderate downturn in business activity, further reinforces a cautious stance towards gold investments.
Despite this, the US dollar has so far struggled to attract any significant buyers and remains within striking distance of its lowest level in nearly three weeks. This, along with geopolitical risks stemming from conflicts in the Middle East, could act as a tailwind for the safe-haven Gold price. In the absence of any relevant market-moving economic data, the US bond yields and the USD price dynamics might continue to play a key role in driving demand for the XAU/USD. Traders will further take cues from the broader risk sentiment to grab short-term opportunities on the last day of the week.
Technical analysis and scenarios:
Given the downtrend indicated by the Alligator indicator and the lack of clear momentum from the AO and AC indicators, the main scenario suggests a continuation of the bearish trend.
Main scenario (SELL)
Recommended entry level: Current price
Take profit: 2015
Stop loss: 2013
Alternative scenario (BUY)
Recommended entry level: 2031
Take profit: 2044
Stop loss: 2015