Hawkish Fed outlook weighs on gold ahead of US PCE inflation

Gold slips as further Fed tightening remains an option.
December rate-hike prospects put the US PCE inflation release in focus.
XAU/USD stays close to the lower Bollinger Band, with RSI and MACD signalling a seller advantage.

Gold (XAU/USD) is trading around $4,030 at the time of writing. The metal is down 0.88% on Thursday as a December rate increase remains firmly on the table following the Federal Reserve’s (Fed) latest policy announcement. Although the US central bank left interest rates unchanged at its October meeting, traders are looking to US Personal Consumption Expenditures (PCE) inflation figures for further guidance on the policy outlook.

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A 10-2 vote by the Federal Open Market Committee (FOMC) on Wednesday kept rates at 3.75%-4.00%. A 25-basis-point increase was favoured by Governor Lisa Cook and Cleveland Fed President Beth Hammack. Despite growing evidence of inflationary pressure, the Committee opted to pause. Markets initially interpreted that decision as mildly dovish: Gold advanced, while the US Dollar and shorter-dated Treasury yields fell.

The broader policy signal, however, was still hawkish. Reaffirming his commitment to price stability, Chair Kevin Warsh said that “while overall financial conditions are tighter, I’m unwilling and unable to call them tight.” Addressing inflation, he emphasised, was not a matter of one date or a single economic release.

Although policy was left unchanged, Rabobank analysts note that the Committee “indicated a need for more information to help determine the appropriate policy stance.” The Fed’s reliance on incoming data was further underlined by Chair Warsh’s observation that the “FOMC will receive a lot more data in the weeks through the next meeting,” reinforcing its data-dependent approach to policy decisions.

Further tightening therefore remains firmly on the table, in the assessment of Rabobank’s US strategist, who concludes that, “without providing forward guidance, Warsh essentially made the case for a rate hike in December,”

Around an 80% probability of a December rate increase is currently priced in by traders, according to the CME FedWatch Tool. The next test of that view comes at 12:30 GMT, when the Fed’s preferred inflation measure is released alongside the advance estimate of third-quarter Gross Domestic Product (GDP).

Above 102.00, the US Dollar Index (DXY) remains firm ahead of the releases after declining the previous day. The index measures the Greenback against a basket of six major currencies.

Higher interest rates raise the opportunity cost of owning non-yielding Gold, making the prospect of additional increases a significant drag on the metal. Should PCE exceed expectations, December rate-hike pricing could strengthen and Gold could fall further. Softer data, by contrast, could temper those expectations and allow a short-term recovery.

Technical Analysis: Lower Bollinger Band Supports XAU/USD

At $4,113, the 20-day Simple Moving Average (SMA) remains above XAU/USD on the daily chart. This average is also the middle Bollinger Band, leaving the short-term outlook bearish. Buying momentum remains weak, with the Relative Strength Index (RSI) near 38 but not yet in oversold territory. A slightly negative Moving Average Convergence Divergence (MACD) also indicates that sellers remain in control.

The first upside hurdle is the 20-day SMA around $4,113. Beyond it lies the upper Bollinger Band at $4,229. A sustained break above both levels could clear a path towards $4,400.

Further losses are likely to be limited by the lower Bollinger Band around $3,998 and the earlier support zone near $4,000-$3,950. A clear break beneath this area, however, could lead to a deeper sell-off.

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

Gold: Key Questions

What attracts investors to Gold?

Widely used as both a store of value and a means of exchange, Gold has held an important place throughout human history. Today, its appeal extends beyond its lustre and use in jewellery. The precious metal is widely regarded as a safe-haven asset and therefore a suitable investment during periods of turbulence. Because it does not depend on a particular issuer or government, Gold is also commonly viewed as a hedge against inflation and currency depreciation.

Which buyers hold the most Gold?

The largest holders of Gold are central banks. To support their currencies during unsettled periods, they typically diversify reserves and purchase Gold, strengthening perceptions of their economies and currencies. Substantial Gold reserves can also bolster confidence in a country’s solvency. According to World Gold Council data, central banks increased their reserves by 1,136 tonnes in 2022, with purchases worth around $70 billion. That was the largest annual purchase on record. Emerging-economy central banks, including those in China, India and Turkey, are rapidly expanding their Gold holdings.

How does Gold move relative to other assets?

Both the US Dollar and US Treasuries are major reserve and safe-haven assets, and Gold is inversely correlated with them. Dollar weakness typically supports Gold, allowing investors and central banks to diversify their holdings in turbulent periods. Risk assets also have an inverse relationship with Gold. Equity rallies tend to put pressure on the metal’s price, whereas selling in riskier markets generally supports it.

Which factors drive Gold prices?

Numerous factors can influence Gold prices. Its safe-haven role means geopolitical instability or concerns about a deep recession can send prices sharply higher. Gold pays no yield, so lower interest rates tend to support it, while higher borrowing costs generally weigh on the metal. Most price movements nevertheless depend on the performance of the US Dollar (USD), since Gold is quoted in dollars (XAU/USD). Dollar strength typically restrains Gold prices, while a weaker currency is likely to lift them.