Fed rate decision lifts XAU/USD to new all-time high

• Gold climbed to a new record high of over $2,600 this week.
• The short-term technical outlook suggests that XAU/USD is close to becoming overbought.
• Fedspeak and PCE inflation data could weigh on gold next week.

Gold (XAU/USD) hit a new all-time high above $2,600 as the US dollar (USD) faced strong selling pressure following the Federal Reserve’s (Fed) decision to cut its policy rate by 50 basis points basic. The precious metal is close to becoming technically overbought ahead of Friday’s release of the Personal Consumption Expenditure (PCE) price index, likely the next big catalyst for gold.

Gold bulls brace for dovish Fed decision

After ending the previous week on a bullish note, Gold entered a consolidation phase on Monday. With markets taking a cautious stance ahead of Fed policy announcements, XAU/USD closed in negative territory on Tuesday.

On Wednesday, the Fed announced it had cut its policy rate by 50 bps to a range of 4.75%-5%. Ahead of the event, CME’s FedWatch tool showed there was about a 40% chance the Fed would opt for a 25 bps cut. Therefore, the immediate market reaction triggered a USD selloff. In turn, gold gained bullish momentum and hit a new high of $2,600. Meanwhile, the revised Summary of Economic Outlook (SEP) showed that policy makers were forecasting a total rate cut of 50 bps in the remaining two policy meetings of the year.

Following the sharp selloff, the negative shift in risk sentiment helped the USD stage a rally later in the US session, causing XAU/USD to make a sharp reversal and close the day in the red. Investors may have seen the big rate cut as a sign that the Fed was slow to react to a worsening economic outlook and weakening labor market conditions. However, Fed Chairman Jerome Powell’s reassuring comments on the labor market and growth outlook appear to have allowed markets to breathe a sigh of relief.

“We don’t think we need to see further slack in the labor market to get inflation down to 2 percent,” Powell said, adding that he saw no signs of an increased likelihood of an economic recession.

Once the Fed dust settled on Thursday, risk flows began to dominate the action in the financial markets. The USD came under renewed selling pressure, opening the door for another leg higher in gold. After data released by the US Department of Labor showed that the number of first-time jobless claims fell to 219,000 in the week ended September 14 from 231,000 the previous week, XAU/USD corrected less early in the US session . However, with Wall Street’s main indexes posting impressive gains, the USD failed to maintain its recovery momentum, allowing gold to end the day in the green.

In the absence of high-level data releases, Gold extended its rally and set another all-time high above $2,600 on Friday.

Gold investors shift focus to US data, Fedspeak

The US economic calendar will present preliminary S&P Global Manufacturing and Services Purchasing Managers (PMI) data for September on Monday. If the manufacturing PMI recovers above 50 and the services PMI holds comfortably above 50, investors will likely be encouraged by the robust economic outlook. In this case, the USD could remain resilient against its major rivals and cause XAU/USD to correct lower. On the other hand, weaker-than-forecast PMI readings will likely have an opposite effect on USD valuation.

On Thursday, the US Bureau of Economic Analysis (BEA) will release its final revision of Q2 Gross Domestic Product (GDP) data, which is unlikely to trigger a market reaction. On Friday, the BEA will release PCE price index numbers for August, the Fed’s preferred gauge of inflation. Investors are less worried about inflation than they were at the start of the year. However, a strong increase of 0.3% or more in the monthly core PCE price index could boost the USD. On the other hand, a weak reading could weigh on the USD with immediate reaction.

With the end of the Fed’s lockdown period, investors will be paying close attention to policymakers’ comments. According to CME’s FedWatch tool, markets are pricing in a nearly 70% probability that the Fed will cut the policy rate by at least another 75 bps in 2024. If Fed officials dismiss the possibility of a bigger rate cut this year, market positioning suggests the USD could bounce back, pulling XAU/USD lower. If policy makers accept the idea of ​​another 50 bps cut at one of the next meetings, it is likely that the USD will struggle to find demand.

Gold technical outlook

The Relative Strength Index (RSI) indicator on the daily chart rose to 70 this week. Gold remains in the upper half of the ascending retracement channel since late June. The upper limit of the channel lines up as a key resistance level at $2,630. The last time the daily RSI hit 70 and Gold climbed above the upper limit of the ascending channel in mid-July, there was a sharp correction. Therefore, buyers may refrain from committing to another higher level in the near term and allow gold to correct lower if it becomes overbought by rising above $2,630.

On the downside, $2,600 (round level) lines up as interim support ahead of $2,570 (the midpoint of the ascending channel) and $2,530, where the 20-day Simple Moving Average (SMA) is located.

It is difficult to set a short-term upside target because gold is already trading in uncharted territory. The $2,700 round level could be seen as the next resistance if investors ignore overbought conditions.