Big Day for Gold – How to Trade Gold on US Fed Rate Cut Verdict?
Arslan Butt • 2 min read
What’s up, traders.
On Wednesday, the market is all about Federal Fund Rate decision which is due later today. The precious metal gold was mostly unchanged in the early Asian session as most of the traders awaited the outcome of a US Federal Reserve meeting at which policymakers are expected to cut interest rates for the first time since the financial crisis.
Recalling FX Leaders July 31 Brief, we spoke about the potential reaction of gold on the release of FOMC and Fed Fund Rate. Investors are expecting the Federal Reserve to cut the interest rates from 2.50% to 2.25%.
What Happens if Fed Actually Cuts Interest Rates?
In order to understand gold’s behavior, we need to first predict the dollar. I think the initial response to Fed rate cut is likely to be a sharp dip in the dollar index.
Since most of the interest rate cut decision is already priced in and it may not be surprising for investors, the dollar may soon reverse to exhibit a bullish reversal. Considering that the US dollar shares a negative correlation with commodities, especially with gold as they are considered substitutes of each other, we may see the opposite trend in gold.
Gold’s initial response is likely to be a sharp buying, but as 25 base point rate cut is already priced in, so we may not see a continuation of the bullish rally. Later, we may see a bearish reversal in gold.
GOLD – XAU/USD – Technical Outlook
Taking a look at the 2-hour chart, gold has violated the strong resistance at 1,427/29. It’s the same level which provided solid resistance to gold back on July 22, 24 and 26. But now, it’s likely to provide support to precious metal at 1,429.
Gold also has a bullish crossover above 50 and 100 periods EMA, which is suggesting a bullish bias among traders. RSI and Stochastics are holding in the bullish zone, and these are likely to enter overbought zone very soon, but I won’t consider RSI and Stochastics in case of Fed rate cut as no matter what RSI is suggesting, a weaker dollar may lead gold prices towards 1,440 today and even higher. But soon they may start dropping below 1,440/48 zone.
Gold – XAU/USD – Trade Signal
The idea is to stay bullish above 1,428 with a stop loss below 1,425 and take profit around 1,435 and 1,440.