Gold experienced a retreat after briefly testing the $2,070 level on Friday, just ahead of the pre-holiday close. This pullback comes as rising investor bets of faster and more frequent rate cuts by the Federal Reserve (Fed) have squeezed Gold higher in recent weeks. However, with receding US inflation and a cooling off of the economy, there are uncertainties surrounding the extent of the rate cuts that the Fed will execute, leading to a decline in investor optimism.
One of the driving factors behind the increase in investor bets on rate cuts is the easing of US inflation. The US Annualized Core Personal Consumption Expenditures (PCE) Price Index in November grew by 3.2% from the same time last year, slightly lower than market forecasts of 3.3% and a decline from the previous period’s 3.4%. This decrease has put downward pressure on the US Dollar, while also sparking interest in Gold as a hedge against inflation. However, the optimism surrounding aggressive rate cuts by the Fed may have been overdone, as the Fed’s dot plot of interest rate expectations shows a median forecast of only 75 basis points in rate cuts through the end of 2024.
Reversal in Friday’s Early Action
As markets wrap up the last full trading week of 2023 and prepare for the holiday market break, there was a notable reversal in Friday’s early action. The US Dollar pared back its losses, and Gold retreated from its earlier highs towards the day’s opening bids. Spot Gold had climbed over 1.10% bottom-to-top on Friday, but hit a resistance level at $2,070 and reversed back towards the $2,050 level. This reversal suggests that investor optimism for aggressive rate cuts may be diminishing, causing a reevaluation of positions before the holiday market break.
Intraday action in XAU/USD has been strongly bid recently, outperforming the 200-hour Simple Moving Average (SMA) since breaking above it near the $2,020 level last week. Additionally, a higher-lows pattern has been forming on daily candle charts since Spot Gold bottomed out near $1,820 in early October. Furthermore, long-term technical support is being provided by the 200-day SMA, which is rising into the $1,960 region. Despite December’s early rally into all-time highs, Gold will need to fall back below the $2,000 major handle to develop bearish patterns and signal a potential change in direction.
As Gold retreats from its recent highs, investor hopes of aggressive Fed rate cuts are being reevaluated in light of easing US inflation and a cooling off of the economy. The pullback in Gold prices suggests that the market may have overestimated the extent of rate cuts that the Fed will execute in the coming years. Additionally, technical indicators for Gold show a strong bid in intraday action and a higher-lows pattern on daily charts, indicating underlying support. However, a fall below the $2,000 level is necessary to confirm a change in direction for Gold. As markets prepare for the holiday market break, it will be interesting to see how investor sentiment develops in the new year and how it will impact Gold prices moving forward.