• Gold struggles to capitalize on its gains registered over the past two days amid a bullish USD.
• Fed rate hike bets and geopolitical uncertainties continue to underpin the safe-haven buck.
• Traders now look to the FOMC rate decision and key US macro releases for fresh impetus.

Gold (XAU/USD) extends its retracement slide from the weekly high touched during the Asian session on Wednesday, falling further below $4,050 heading into the European session and ahead of the key central bank event. The US Federal Reserve (Fed) is scheduled to announce its policy decision later today and is widely expected to keep rates unchanged. Hence, the focus will be on the accompanying policy statement and Fed Chair Kevin Warsh's comments during the post-meeting press conference.

Apart from this, Thursday's key US macro releases – the Advance Q3 GDP report and the Personal Consumption Expenditures (PCE) Price Index – will be looked at for more cues about the Fed's future policy path. The outlook, in turn, will play a key role in influencing the near-term US Dollar (USD) price dynamics and provide some meaningful impetus to the non-yielding bullion. In the meantime, the CME Group's CME FedWatch Tool indicates that traders are pricing in over an 80% chance that the US central bank will raise borrowing costs again in December. Adding to this, inflationary concerns stemming from elevated energy prices underpin prospects for further Fed tightening, which, in turn, keeps a lid on the non-yielding bullion.

Fed pause seen in October as markets eye December tightening

Strategists at BNY Markets align with current pricing in expecting the Fed to stand pat this week, noting that “in line with the market, we don’t foresee a rate hike in October and prefer to place our expectations for further tightening on the December meeting.” However, BNY cautions that “we do expect at least one dissent, if not more, in favor of raising rates.” In their view, “if we’re right, and there is an objection (or two), we would expect the market to interpret Wednesday’s decision hawkishly, solidifying the expectation of a hike at the end of the year.” Looking ahead to the press conference, they add that “we don’t see any preview of what we expect to be a December hike, given Chair Kevin Warsh’s disinclination to provide guidance on future policy moves. Nevertheless, we think that market expectations for a December hike will be solidified.”

Meanwhile, the geopolitical risk premium remains in play amid fears of a further escalation of tensions in the Middle East. In fact, The Wall Street Journal reported on Tuesday that the US has told several Gulf Arab countries to prepare for a short and intense military campaign against Iran after the November 3 midterm elections. Adding to this, Iran-backed Houthis in Yemen claimed that they targeted Saudi Arabia's defence ministry in Riyadh with a ballistic missile and that the hit was direct. Moreover, US–Iran negotiations remain deadlocked, triggering a fresh leg up in crude oil prices and assisting the safe-haven greenback to preserve its recent strong gains to a two-week high. This turns out to be another factor weighing on the Gold price.

The XAU/USD pair, however, holds comfortably above a three-month low touched earlier this week, warranting some caution for aggressive bearish traders. That said, the aforementioned fundamental backdrop suggests that the path of least resistance for the precious metal remains to the downside and any attempted recovery is more likely to be sold into.

XAU/USD 1-hour chart

Technical Analysis

The XAU/USD pair holds just above the 100-hour Exponential Moving Average (EMA) at $4,044.21, which underpins price and tempers immediate downside pressure. That said, the Relative Strength Index (RSI) around 55 suggests only modest bullish momentum. Moreover, the Moving Average Convergence Divergence (MACD) has slipped into negative territory, hinting that upside attempts may be losing traction as the market digests the prior advance. Adding to this, the overnight failure to find acceptance above the 38.2% Fibonacci retracement level of the latest downswing warrants caution for bullish traders.

However, sustained strength beyond the 38.2% Fibo. hurdle at $4,063.08 could pave the way for additional gains to the 50% level at $4,089.75 and the 61.8% retracement at $4,116.43, with higher barriers at $4,154.40 and the cycle high near $4,202.78. On the downside, a convincing break below the 100-hour EMA immediate support would expose the 23.6% Fibo. retracement at $4,030.07, with a deeper pullback potentially targeting the structural floor around $3,976.72.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

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.

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.