Gold Price Analysis: XAU/USD still stuck in rangebound conditions ahead of FOMC meeting result

• Spot gold prices remain in consolidation mode with markets in wait-and-see mode ahead of Wednesday’s FOMC meeting.
• XAU/USD has traded as a function of subdued US government bond yields, with soft data failing to shift the dial.

Spot gold prices (XAU/USD) are in consolidation mode for a second straight day, albeit they continue to trade with a positive bias. XAU/USD prices have traded within a tight $1725-$1740ish range, having advanced marginally above Monday’s low-$1720s to $1735ish range. As of right now, XAU/USD is flat on the day trading around the $1730 mark, with the precious metal having been unable to convincingly break above last Thursday’s $1740 top.

Driving the day

US government bond yields continue to move sideways whilst the Dollar Index (DXY) remains rangebound under the 92.00 level – both are in consolidation mode ahead of Wednesday’s FOMC meeting. Gold, which often takes its cue from these two asset classes, has thus also struggled to find any meaningful direction ahead of the big event of the week.

In terms of recent fundamental developments, soft US data on Tuesday failed to shift the dial; US Retail Sales dropped more than expected in February, but that mostly represents the fading boost of January’s stimulus cheques. Retail sales will undoubtedly jump again in March after the government hands out another $1400 to each US citizen. Meanwhile, Industrial Production in the month of February also disappointed. Analysts note that poor weather conditions last month contributed to the drop, but note also that global supply shortages also played a factor and this could be a longer-lasting drag.

Otherwise, there has been very little news of note to drive markets. Aside from the FOMC meeting, a large dose of international central bank activity on Thursday (including a BoE rate decision and comments from ECB President Christine Lagarde) and the US/China get-together in Alaska will be the main events of note. Though the major focus for precious metal traders is likely to remain on what happens with USD and US government bond yields in wake of the Fed, however; if both move higher, gold is in for some pain, whilst if both move lower, gold will rally.

Fed Preview

Meanwhile, Wednesday sees the FOMC release the result of their latest monetary policy decision; the bank is expected to hold interest rates at their zero-lower band (0.0-0.25%) and the rate of asset purchases steady at $120B per month (of which $80B are US government bonds).

The Fed statement and Fed Chair Jerome Powell’s remarks in the press conference are likely to stick to the usual dovish tone; i.e. no rate hikes until the bank has met its updated dual mandate (i.e. full employment and inflation that is moderately and sustainably above 2.0%), something which the Fed is likely to reiterate is still a long way off, and no tapering of asset purchases until substantial further progress has been made towards its dual mandate (something which Powell is also likely to say is a long way off).

The Fed will be releasing new economic projections which will be more closely scrutinised than usual; officials have been talking about how they expect inflation to pick up in the short-run and the updated inflation forecasts will formalise such expectations. The updated dot-plot is also of note; markets have brought forward their expectations of the first Fed hike as soon as late-2022/early-2023, despite the Fed’s old dot plot not forecasting any hikes through to 2024. Maybe the new dot plot might foresee a hike in 2023 (if not, that would be dovish).

Meanwhile, traders will also be on the lookout for any more information of if, when, and how the Fed might respond to further increases in US government bond yields, as well as any hints as to the conditions the Fed might want to see before tapering asset purchases – more information on the former is more likely than on the latter, as the Fed will likely want to avoid causing yields to move higher.

A few technical factors are also worth considering; bank SLF relief (which means they do not have to hold capital reserves for their treasury holdings) is set to expire this month and the Fed needs to decide whether to extend this. If not, this could cause some market problems as banks rush to meet their new, higher capital requirements. Some desks also think the bank might tweak the Interest of Excess Reserves Rate (IOER), which is a tool the bank uses to keep the Federal Funds rate within its target band – if they do, they will insist that this does not constitute a tweak to monetary policy, rather just a technical adjustment to maintain policy.