Gold prices have seen a decrease after encountering resistance at 3,438, influenced by trade deals and a lack of positive catalysts. As the market awaits the Federal Open Market Committee (FOMC) decision, expectations are that the Federal Reserve will maintain the current status. A potential rate cut in September remains possible if inflation figures become more favourable.
The upcoming Non-Farm Payroll (NFP) report could play a pivotal role: softer data might prompt the Fed to consider rate cuts, whereas stronger data could lead to maintaining the current stance. Long-term trends suggest gold could remain upward due to decreasing real yields with potential Fed easing, though adjustments in interest rate expectations may cause short-term corrections.
Gold Daily Chart Analysis
On the daily chart, gold has dipped below a major trendline, with losses extending as more sellers emerge. The key level to watch is 3,120, where dip-buyers may aim to push back towards the 3,438 resistance. On shorter timeframes, a downward trendline persists, with sellers aiming to push further down to 3,246, lacking bullish momentum ahead of the FOMC decision.
Significant upcoming data include US Job Openings and Consumer Confidence, along with the US GDP and Employment reports later in the week, which will influence market movements.
With gold pulling back from its recent high above $2,400, we see this as a critical decision point for traders. The lack of immediate bullish news has created short-term weakness, but the larger uptrend remains intact. This environment is ideal for derivative strategies that can capitalize on both the expected volatility and the underlying trend.
Federal Open Market Committee Meeting Outlook
The upcoming Federal Open Market Committee meeting is the main event, but we don’t expect any policy changes. According to the CME FedWatch Tool, the market is pricing in a greater than 99% chance that rates will be held steady in June. What matters is the tone from Powell, as any hint of delaying rate cuts into late 2024 could trigger a further correction in gold prices.
We view the upcoming Non-Farm Payrolls report as the most significant catalyst. The last report in early May showed a cooling labor market with 175,000 jobs added, well below expectations, which initially supported gold. If the next report on Friday is surprisingly strong, it could push gold down towards the key support level around $2,280 per ounce.
Inflation data remains a pivotal factor for the Federal Reserve’s decisions. The most recent Personal Consumption Expenditures price index showed core inflation holding at 2.8% annually, still above the target. This persistent inflation gives officials reason to remain patient, capping gold’s immediate upside potential and reinforcing the short-term bearish momentum.
For derivative traders, this suggests an opportunity to purchase puts with a strike price near the $2,280 level to profit from a potential drop following strong economic data. Alternatively, selling call spreads with an upper strike price around the recent highs of $2,400 can generate income while momentum remains weak. This strategy allows traders to benefit from the price decline or sideways movement in the coming weeks.
Historically, gold has performed well during rate-cutting cycles, such as the one in 2019 which saw a significant rally. We believe the long-term outlook remains bullish due to inevitable easing and falling real yields. Therefore, any significant dip could be an opportunity to establish longer-term positions, possibly using long-dated call options for leveraged exposure to the eventual rebound.
Beyond U.S. monetary policy, we must also consider the strong underlying demand from central banks. The World Gold Council reported that central banks added a net 290 tonnes to their reserves in the first quarter of 2024, demonstrating a powerful floor under the market. This structural buying should limit the depth of any correction and provides confidence for buying on weakness.
