The persistent nature of inflation has led to reassessment among traders, who are increasingly betting on a delay in the first rate reduction. The possible move from June to July would allow more time for the current interest rates to impact exert their intended dampening effect on demand and inflation. This adjustment in expectations is reflected in Fed fund futures, where the likelihood of a June rate cut has decreased from nearly 75% to less than 60% in just a week’s time. Interest-rate swaps also pushed bets on the timing of the full first quarter-point rate cut to the July.

The prospects for three rate cuts within the year, as previously indicated in the December dot plot, are also being reconsidered. Current pricing in the Fed fund futures suggests only about 65% chance of federal funds rate at 4.50-4.75% (down from current 5.25-5.50%,) by the end of the year, a marked shift from expectations following the December meeting. Swaps pricing is also showing less than 75 bps of easing priced this year.

In the bearish case, rejection by 55 D EMA, followed by break of 102.35, will argue that fall from 104.97 is the third leg of the decline from 107.34. Deeper decline should be seen to 100.61 support and possibly below. But break of 99.57 is not envisaged.

In the bullish case, sustained trading above 55 D EMA will argue that rise from 100.61 is the third leg of the pattern from 99.57 and is still in progress. Further break of 104.97 will target 107.34 resistance.

Gold price needs a dovish Fed surprise to target new record high

The Fed will announce monetary policy decisions and publish the revised Summary of Economic Projections (SEP), the so-called dot plot, on Wednesday. The Fed is widely expected to leave the monetary policy settings unchanged.In December, the dot plot showed that Fed policymakers were forecasting a total of 75 basis points (bps) of rate cuts in 2024. The CME FedWatch Tool shows that markets are pricing in a nearly 70% probability that the policy rate will be lowered by at least 75 bps after the Fed’s policy meeting in December.In case the SEP shows that policymakers are leaning toward a total of 50 bps rate cuts this year, the market positioning suggests that the initial reaction could provide a boost to the USD. Investors will also pay close attention to inflation forecasts. If the inflation projection for 2024, which was 2.4% in December’s SEP, is left unchanged or revised higher despite a shift toward 50 bps cuts, this could amplify the positive impact on the USD. On the other hand, the USD could come under renewed selling pressure if the dot plot shows that policymakers still favor a total of 75 bps cuts in 2024. A downward revision to the inflation forecast could also be seen as a dovish development. In this scenario, a steady decline in the 10-year US yield could fuel another leg higher in XAU/USD.