Gold consolidates gains as traders brace for Fed interest rate decision

Gold regains ground as traders trim bearish positions ahead of the Federal Reserve interest rate decision.
The Fed is widely expected to deliver its first rate hike since July 2023.
XAU/USD trades in a neutral technical setup, supported by the 50-day and 100-day SMAs, while the 200-day SMA caps the upside.

Gold (XAU/USD) consolidates gains on Wednesday after rebounding during Asian trading hours, supported by a modest pullback in Oil prices and US Treasury yields. The metal is struggling to build on the intraday advance as traders avoid taking aggressive positions ahead of the Federal Reserve’s (Fed) monetary policy announcement, while a firm US Dollar (USD) also keeps the gains in check. At the time of writing, XAU/USD trades around $4,350, up 1.30% on the day.

The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, holds near two-week highs around 99.70. The benchmark 10-year US Treasury yield stands near 4.96% after hitting 5.04% on Tuesday, its highest level since 2007. West Texas Intermediate (WTI) Oil trades around $97.50, down 3.30% during press time.

The US central bank will announce its decision at 18:00 GMT, followed by Fed Chairman Kevin Warsh’s press conference at 18:30 GMT. Markets widely expect a 25 basis-point rate hike, taking the federal funds target range to 3.75%-4.00%. If delivered, it would be the Fed’s first interest-rate increase since July 2023.

The anticipated rate increase reflects growing inflation risks from the energy shock caused by the war in the Middle East. With the United States and Iran still far from reaching a resolution and Oil prices holding at elevated levels, the Fed’s task of returning inflation to its 2% target has become more difficult.

At the same time, the US labour market appears stable after a strong August employment report, giving policymakers more room to tighten policy. That view is reinforced by Wednesday’s US Retail Sales data. Sales rose 1.2% MoM in August, above the 0.8% forecast and rebounding from a 0.5% decline in July.

Strategists at ING expect the Fed to deliver what they describe as a “consensus 25bp” rate increase “to 4.0% today,” noting that “markets are pricing in 23bp for today, 52bp by year-end, and 89bp by June.” They caution that “a surprise hold would likely deliver a big blow to the Dollar: both through the dovish repricing in front-end rates and a likely selloff in the back end.”

In their view, this risk profile “also argues for a hawkish message,” as “a dovish hike may not be enough to convey the monetary policy discipline bond investors currently demand, particularly given the amount of tightening already priced into swaps.”

Higher borrowing costs are usually negative for Gold because they increase the appeal of interest-bearing assets such as government bonds. However, with a quarter-point increase almost fully priced in, the metal’s reaction is likely to depend more on the updated Summary of Economic Projections, including the dot plot, and Warsh’s post-meeting remarks.

A hawkish Fed signal pointing to more rate increases could weigh on Gold. However, if the Fed avoids committing to another rate hike, the metal could build on its recovery.

Technical Analysis: 200-day SMA remains key barrier for XAU/USD bulls

On the daily chart, XAU/USD sits in a mid-range configuration, holding above the 50-day Simple Moving Average (SMA) and the 100-day SMA, yet remaining capped well below the 200-day SMA around $4,540. This alignment suggests a neutral-to-capped bias, with price supported by medium-term averages but still below the broader downtrend marker. The Relative Strength Index (RSI) at 48 underscores a flat momentum profile, while the Moving Average Convergence Divergence (MACD) histogram remains in negative territory, hinting that upside attempts could struggle while the 200-day SMA stays overhead.

On the downside, initial support is seen at the 100-day SMA around $4,326, followed by the 50-day SMA near $4,280, with more robust demand expected at the horizontal levels of $4,150 and then $4,000 if selling pressure accelerates.

On the topside, the first significant resistance comes at the 200-day SMA around $4,540, and a break above this barrier would expose the next key cap at the horizontal resistance zone near $4,700.