Gold weekly outlook: All eyes on FOMC and Warsh

Gold fell 1.8% last week and is now down for a third consecutive week, suggesting that momentum continues to fade following the powerful surge we saw in August. On Friday, the precious metal initially fell in reaction to the US CPI data but then rallied sharply from its lows immediately afterwards in a classic “sell the news” reaction, before fading into the close. Ultimately, gold finished Friday’s session 0.7% higher. We maintain a slightly bearish gold outlook amid a challenging macro backdrop, ahead of the FOMC rate decision in the week ahead.

 

Fed meeting could impact gold outlook

 

Heading into the week ahead, the technical momentum suggests we could see at least some further moderate losses ahead of the FOMC meeting on Wednesday. It is going to be an important policy decision, particularly given the stronger inflation data and recent warnings from Kevin Warsh about the risk of inflation remaining above target for too long.

 

The key question is whether a rate hike would be a one-and-done move, or whether we could see further increases later this year.

 

Oil and Treasury yields add pressure

 

Oil prices have also surged in recent days, although they eased slightly on Friday. Nevertheless, the broader trend remains firmly higher, adding another source of inflationary pressure to the market. If inflation continues to rise, there is little reason for the Fed to rule out further tightening.

 

Against that backdrop, US Treasury yields have continued to push higher. The 10-year yield came close to the 5% level last week, a psychologically important threshold where we could see some profit-taking. Ultimately, though, the bond market remains under pressure and yields continue to rise.

 

That is not an ideal macro environment for gold. With real yields and expectations for interest rates moving higher, the precious metal is likely to remain vulnerable, particularly if the US dollar continues to find support.

 

Key gold support levels

 

From a technical perspective, the bias therefore remains to the downside. Key resistance around $4,400 held once again on Friday. This level has been tested on a number of occasions in recent days and, so far, continues to cap the upside.

 

 

Gold could return to the $4,100 area in the not-too-distant future, potentially around Wednesday’s Fed decision. A break below that level would expose $4,000, while below there, the June low around $3,942 would come into focus.

 

There is, however, an alternative scenario. If the US dollar debasement trade returns and XAUUSD manage to break decisively above $4,400, the next target would be around $4,500. The 200-day moving average currently comes in at around $4,538, followed by resistance near $4,600.

 

Gold outlook: Bearish bias remains

 

For now, though, both the macro and technical backdrop remain bearish for gold. Unless we see a renewed shift towards the dollar debasement trade, I would expect further downside pressure on the precious metal in the near term.