Gold Price Analysis: XAU/USD flatlines near $1870 pre-Fed and US data dump, bears eye 200DMA in $1830s

• Gold is in wait-and-see mode and trading nearly flat in the $1870 area with key risk events upcoming on Wednesday.
• The main risk event of the day will be the Fed’s policy announcement, with a 50 bps rate hike expected.
• XAU/USD remains locked within the bearish trend in play since mid-April and is eyeing a test of its 200DMA.

Spot gold (XAU/USD) markets are in wait-and-see mode ahead of the release of a batch of important US economic data and the Fed’s latest monetary policy decision. For reference, US payroll company ADP will release their estimate of private employment change in the US in April at 1315BST, followed by the release of the April ISM Services PMI survey at 1500BST and the Fed’s policy announcement at 1900BST. Fed Chair Jerome Powell will then be delivering his usual post-Fed meeting press conference from 1930BST.

XAU/USD is currently trading completely flat on the day around $1868 per troy ounce, with prices for now stable above Tuesday’s lows at $1850, but very much still locked within the downtrend that has been in play since mid-April. Since coming within a whisker of hitting the $2000 mark on 18 April, prices are down roughly 6.5%.

That downturn reflects the bearish headwinds of a significantly stronger US dollar and much higher US yields. Since April 18, the Dollar Index (DXY) has rallied nearly 3.0% from around 100.50 to current levels in the mid-103.00s. US 10-year yields, meanwhile, are up over 10 bps and look likely to break above the 3.0% and to fresh multi-year highs in the near future.

A stronger US dollar makes USD-denominated commodities (like XAU/USD) more expensive for international buyers, while higher yields raise the “opportunity cost” of holding non-yielding assets (such as gold). These recent FX and bond market trends that have proven such a headwind to gold come ahead of an expected acceleration in the pace of monetary tightening from the Fed.

The US central bank is expected to lift interest rates by 50 bps on Wednesday, signal rates reaching the 2.5% area by the year’s end (meaning more 50 bps rate hikes at upcoming meetings) and outline balance sheet reduction plans. Markets will be focused on any hints from Fed Chair Jerome Powell as the where the Fed’s so-called “terminal” interest rate might be, with many Fed officials in recent weeks suggesting they see it as likely that the Fed will need to take interest rates above 2.5% to combat inflation.

Any hints towards a higher terminal rate in the US from the Fed Chair could ignite further upside in the US dollar and US yields, and trigger a breakout below $1850 in XAU/USD. In this case, traders should note support in the $1830s in the form of gold’s 200-Day Moving Average. Below that, its pretty much clean air all the way to an early 2022 double bottom in the $1780s.