19.07.202311:36 Forex Analysis & Reviews: Gold turns bullish amid nearing end of Fed's monetary restriction cycle

When the Federal Reserve is preparing to fire the last bullet from its gun, a rally in gold should come as no surprise. The nearing end of the monetary policy tightening cycle creates a favorable background for "bulls" on XAU/USD. In such conditions, the yield on Treasury bonds decreases, and the U.S. dollar retreats. This combination of debt and currency market conditions leads to a renewed interest in gold-oriented ETF purchases and price increases.

Investors are increasingly leaning towards the idea that the long-awaited recession of the decade may not occur. If there is an economic downturn in the U.S., it will be mild and short-lived. This provides a basis for increased demand for commodity market assets, including gold and silver. At the same time, the expected increase in the federal funds rate by 525 basis points will soon start to bite. Macroeconomic statistics for the United States will deteriorate, and discussions about raising borrowing costs will completely disappear from the market. Currently, only 19 out of 106 Reuters experts believe in the FOMC's June forecast of a rate hike to 5.75%.

"Hawks" will be replaced by "doves" and talks of easing monetary policy. Monetary stimulus from the Federal Reserve is a good sign for XAU/USD as liquidity inflows into financial markets will strengthen the investment demand for gold. It is not surprising that after 19 days of outflows from ETFs, capital inflows into specialized exchange-traded funds have occurred for several days. This provides support to the precious metal.

Dynamics of capital flows in ETFs

However, it may not be easy for gold. The 0.6% monthly increase in core retail sales in June indicates the resilience of the American economy. Against this background, the decline in the USD index after the inflation data in the U.S. appears excessive. Gold is an anti-dollar asset. If the USD shows its teeth, XAU/USD will be forced to step back.

Yes, Klaas Knot's statement that a rate hike by the ECB in September is not guaranteed has reduced the yields not only of European but also global bonds and supported the precious metal. However, the speech by the head of the Dutch Central Bank weakened the euro. In other words, it added winds to the USD index. Not the best news for XAU/USD.

Thus, the medium-term prospects for gold look "bullish," but in the near future, there is a high probability of consolidation and a pullback, specially since investors will prefer to stand aside and wait for the verdicts of the Federal Reserve and the ECB on interest rates by the week of July 28.

Technically, the combination of reversal patterns 1-2-3 and Wolfe Waves worked out accurately. The quotes of the precious metal reached the target of $1,990 per ounce according to the latest chart pattern, within arm's length. The long positions formed on the break of $1,943 will allow for additional growth on the pullback. Overall, as long as gold remains above the upper boundary of the fair value range of $1,904–1,954 an ounce, the market situation is controlled by the "bulls," and the focus should be on buying.