Gold Price Forecast: Pullback from yearly highs extends as US Dollar rebounds

Gold price
  • The price of gold is still falling from its highs for the year.
  • Markets stabilise as concerns about a banking catastrophe subside after Credit Suisse’s bailout.
  • Prior to the Federal Reserve meeting on Wednesday, the US dollar strengthens.

When global banking worries subside (for the time being) and US Treasury yields find support, the price of gold declines from its yearly high, supporting a higher US Dollar. The precious metal is still consolidating within a technical uptrend as of this writing, trading around $1,966.

News on gold: Banking bailout eases safe-haven inflow
After Credit Suisse, the most recent victim of the current neo-financial crisis, was swallowed up by rival UBS on Monday, the dust has settled, and gold, the ultimate safe-haven, has lost the upward impetus that helped it reach YTD highs above $2,000.

According to a report by Bloomberg News on Monday, Treasury staff in the United States are looking at ways for regulators to insure more than the existing Federal Deposit Insurance Cap (FDIC) of $250,000 for bank deposits in order to boost trust in the banking system. This offers additional proof to convince investors that the government is ready to intervene to save the day.

US Dollar increases ahead of FOMC
The US Dollar Index, which tracks the value of the world’s reserve currency against a basket of other currencies, rose by 0.20% on the day, indicating that the US Dollar is on the rise. Due to the fact that Gold is valued in US Dollars, there is a tendency for this relationship to be inverse; when the Dollar gains strength, it will often require fewer of them to purchase the same amount of Gold.

The FOMC meeting on March 22 at 18:00 GMT, at which the US Federal Reserve will make its following monetary policy decision, is the following significant event for both Gold and the US Dollar. The probability of a less-significant-than-predicted 0.25% increase in interest rates is currently favourable.

But, if the Fed decides to go big with a 0.50% rate hike, it would strengthen the Dollar and drive down the price of Gold. The opposite will occur if there is no rate cut at all.

But this time, the recent banking crisis, which was partly brought on by rising interest rates, makes the choice a little trickier. The Fed must now evaluate how rising interest rates may affect financial stability in addition to fighting inflation.

Yohay Elam, Product Manager, Premium Offering at FXStreet, anticipates that the Fed will initially chart a hawkish course, giving price stability priority over financial stability.

“Nothing to see here, move along” is how I anticipate the Federal Reserve will respond to the banking crisis by raising interest rates to combat inflation as if nothing has changed. Elam makes this statement prior to the meeting.

He draws attention to the abrupt expansion of the Fed’s balance sheet in recent weeks, ever since the banking crisis started and the central bank intervened to give urgent liquidity to the US banking industry. This, he claims, is proof that “easing by other methods” is taking place, and it implies that the Fed will feel justifiably justified in pursuing its aggressive rate-hiking programme.

But, he believes that Chairman Powell would moderate the hawkish decision with a more nuanced press conference address, which will have little to no overall positive impact on the US Dollar.

“My scenario may be summed up as follows: risk-off on the rate hike and the dot plot, then an instantaneous and minor recovery in response to the statement. Then, Powell would encourage taking risks even more by promising to act when necessary and by speaking kindly about the labour market.” Elam says.

Technical analysis of the gold price: Retracement within an Uptrend
From a technical standpoint, the short- and medium-term timeframes of the gold price continue in an uptrend. After reaching a high on Monday, it has been descending in a steep channel, but it now seems to be drawing back up.

On the 4-hour chart, the Average Directional Indicator (ADX) is at 55, which is a very high value. As ADX rises above 50, an indication that the trend may be nearing exhaustion, it indicates how strongly the price of an asset is trending. Given that the high reading was accompanied by a two-bar pattern that reversed from Monday’s highs and a steady decline afterwards, it may be an indication that gold prices are about to decline further, perhaps to the channel’s base around the $1,960 area.

Yet, the overall trend is optimistic, indicating that once the correction is through, prices will likely continue to rise. For the uptrend to be reversed or a deeper decline to occur, there may need to be a clear break and close below the lower channel line.