Gold price correction This week won’t derail a broader rally as Fed looks to cut rates
The Federal Reserve has given the all-clear to gold after signaling it still wants to cut interest rates three times this year, even as inflation remains above the 2% target; however, some market analysts said that the precious metal could see a healthy correction next week and in the near term.
Following the Federal Reserve’s monetary policy meeting on Wednesday, gold prices rallied to a record high above $2,220 an ounce; however, the rally was short-lived, and prices are looking to end the week in neutral territory. April gold futures are currently trading around $2,164 an ounce, only a few dollars up from last week’s close.
Although the market looks a little heavy, a short trading week with markets closed Friday because of the Good Friday holiday could limit price volatility next week.
James Stanley, senior strategist at Forex.com, said that he expects gold prices to ultimately trend higher ahead of the Federal Reserve’s June monetary policy meeting when the central bank is expected to start its easing cycle.
He noted that gold remains well supported as the Federal Reserve signaled that it will ease interest rates even if inflation remains elevated.
“The Fed had every opportunity to strike a more balanced note, but they didn’t. If you look at the data, there is no reason for the Fed to look for three rate cuts this year. They don’t need to cut as the unemployment rate remains at the lowest point in my lifetime,” he said. “The fact that the Fed didn’t strike a more balanced tone raises a lot of questions for me and is a red flag for the economy that I think will continue to support gold.”
However, Stanley added that although he likes gold, he expects to see a correction in the near term. He said that investors should be cautious of chasing prices near record highs.
“Gold wants to go higher, but I think a pullback would be healthy. For investors who were long gold at the start of the month, this would be a good place to take some profits so we could see a short-term correction,” he said.
Looking at technical levels, Stanley said he is watching initial support at $2,146, as that was the December swing high. However, he added that he wouldn’t be surprised to see gold test support at $2,075 an ounce, representing a three-year resistance point before the early March breakout.
Lukman Otunuga, manager of market analysis at FXTM, said that although the Federal Reserve continues to signal rate cuts this year, the depth of the easing cycle will remain data-dependent. He explained that gold needs to see more disappointing economic data in the coming weeks and months to support the current rally.
“Although the Fed has signaled that three US interest rates remain on the cards in 2024, it’s all about economic data which could support or oppose the argument around rate cuts,” he said. “Gold bulls could return to the scene if incoming US data next week supports the case for lower rates. However, bears are also lurking and waiting for another opportunity to strike prices lower.”
Despite the bullish outlook, Otunuga said that, ahead of next week, the gold market “is looking a little tired.”
Although gold prices could see a correction next week, other analysts have said that investors should remain focused on the broader uptrend.
Naeem Aslam, Chief Investment Officer, said that although gold has seen a strong rally this month in anticipation of the Fed’s easing cycle, there is still significant potential for higher prices.
“We certainly haven’t hit high in terms of the gold price. We think that the important ingredient is the Fed’s definition of a normal interest rate, i.e., their target level,” he said. “We do think that the process has started as the Fed is sending a subdued signal that their pre-Covid level needs to be adjusted, and once they make it clean, we would expect the gold price to rally.”
While gold’s technical price action represents a short-term risk, the precious metal also faces some fundamental threats in the near term.
David Morrison, senior market analyst at Trade Nation, said that renewed strength in the U.S. dollar creates a headwind for gold. The greenback is ending Friday at a four-week high above 104 points.
“Could this sudden reemergence of dollar strength indicate that investors are less sanguine than the Fed over the prospect of rate cuts? Perhaps. But it also reflects that the latest round of central bank meetings have made it clear that rate cuts are coming from just about everyone,” he said in a note Friday. “In fact, the Swiss National Bank have already moved. That being the case, the US dollar is back in favour as it’s now the cleanest shirt in the laundry basket. It could be that this shake-out of the weaker holders of gold and silver can set the stage for a bigger rally. But that may be wishful thinking if the dollar continues to strengthen.”
Economic data for next week
Monday: New home sales
Tuesday: Durable goods orders, consumer confidence
Thursday: Weekly jobless claims, US GDP, Pending home sales
Friday: Core PCE price index
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The gold market has managed to reclaim the $2,000 level as it looks to end its second consecutive week in positive territory. However, analysts have said that gold's momentum remains limited, and prices are unlikely to break current resistance levels as the Federal Reserve maintains its tight monetary policy bias.(1).gif)
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