Gold Price Forecast XAU/USD – Bullish Traders Betting Fed Will Reduce or Stop Rate Hikes in Next Few Months

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Gold futures are edging higher on Monday, hovering near a multi-month high, while being supported by softer U.S. Treasury yields and a weaker U.S. Dollar. The catalyst driving the price action is expectations of slower interest rate hikes by the U.S. Federal Reserve.

At 05:19 GMT, February Comex gold is trading $1928.70, up $0.50 or +0.03%. On Friday, the SPDR Gold Shares ETF (GLD) settled at $179.28, down $0.61 or -0.34%.

Strong Rally Supported by Easing Fed Rate Hike Expectations

Gold is up over $300 since reaching a major bottom on November. The steady climb has been fueled by speculators betting the Federal Reserve is moving closer to ending its rate hikes.

Gold was pressured throughout the summer and early fall after the Fed hiked its benchmark rate 75-basis points four times. The market began to accelerate higher after the Fed dropped to a 50-basis point rate hike in December.

The market recently hit its highest level since April 2022 after the financial markets priced in a 25 basis point rate hike at its Jan. 31 – Feb. 1 policy meeting.

Ahead of the policy announcements, some gold speculators are betting the Fed will raise rates 25 basis points twice in 2023 then go on a long pause as it tries to knock down inflation while avoiding a recession.

The Market and the Fed Aren’t on the Same Page

Perhaps capping gold prices over the past week have been concerns over a divergence between the market and the Federal Reserve.

While most investors feel the Fed will hike rates 25 basis points in February, there are some that still believe a 50 basis point hike is still on the table. Furthermore, the market thinks the Fed’s end or terminal rate will come in below 5.0%, while Fed officials have been suggesting it will come in well above this level. This could mean higher rates until at least June.

Because of the divergence, gold traders have been closely following remarks from Fed speakers and scanning them for hints about the central bank’s view.

On Friday, Fed Governor Waller said he backs a quarter percentage point interest rate increase at the central bank’s next meeting. He also said he would tolerate a soft recession if it meant bringing inflation down.

Last week, wholesale inflation figures showed that prices fell by more than expected throughout December, prompting some investors to believe inflation has passed. However, Thursday’s initial jobless claims reflected resilience in the labor market. The strong labor market is one of the areas the Fed has been targeting in its fight against persistently high inflation.

Short-Term Outlook

Gold prices could be capped over the near-term as traders brace for the major Fed decisions on Feb. 1. We could even see a profit-taking driven sell-off, but I don’t expect to see a change in trend to down.

The momentum is clearly to the upside and a dovish Fed is likely to be the catalyst that drives it toward $2000.