The (XAU) price declined by 0.13% on Tuesday as the strengthened ahead of today’s Federal Reserve’s (Fed) policy rate decision.

 ‘Gold is seeing some exhaustion to the upside as the positions moved swiftly over the past week or 2, and now it’s taking a bit of a breather as the Fed pricing comes off a bit,’ said Ryan McKay, the commodity strategist at TD Securities.

In other words, after a swift 1-week rally, which began on 28 February, gold bulls have started to close their long positions as the probability of a 25-basis point (bps) rate cut by the Fed in June has declined.

Furthermore, expecting higher gold prices is risky as is already near all-time highs, while the latest U.S. macroeconomic data didn’t provide reasons for a rate cut. At the same time, a sharp sell-off is also unlikely as safe-haven demand remains strong, and investors still expect global monetary policy to ease in 2024.

XAUUSD was essentially unchanged during the Asian and early European trading sessions. Today, the Fed’s rate is a critically important event for gold traders. It is due at 6:00 pm UTC. In addition to the rate decision, which is unlikely to surprise anyone, the Fed will release its FOMC Economic Projections report, including the so-called ‘dot plot’, showing how each Fed member projects the future path of interest rates.

This ‘dot plot’ is published only 4 times a year, so investors will study the data carefully. Last time, 17 of 19 Fed officials projected lower interest rates by end-2024, and traders priced in a more aggressive rate-cutting cycle. On the day the Fed telegraphed its previous projections, XAUUSD rallied by more than 2% and then increased by another 3% throughout 10 trading sessions.

If the FOMC Economic Projections report is viewed as dovish with more rate cuts on the horizon, the gold price will rise, possibly towards 2,200. Conversely, if the report is hawkish and indicates fewer rate cuts, XAUUSD will almost certainly decline, probably towards 2,125. ‘Spot gold is biased to break a falling trendline and rise into the $2,175–$2,182 range,’ said Reuters analyst Wang Tao.

EURUSD will likely move sharply due to FOMC Economic Projections report

Initially, the exchange rate dropped below 1.08400 but later recovered and finished the day essentially unchanged.

Yesterday, the German report came out stronger than expected, showing an improving investors’ sentiment due to the expectations for an interest rate cut by the European Central Bank (ECB) and positive signs out of China. ‘More than 80% of those surveyed anticipate that the ECB will cut interest rates in the next 6 months,’ said ZEW President Achim Wambach, adding that this could explain a more optimistic outlook on the construction industry.

As a result, EURUSD rallied in the European session yesterday and settled above the important 1.08500. However, the positive effect of the upbeat German statistics will likely be short-lived. The market still expects the ECB to be more dovish than the Fed in 2024, so the fundamental pressure on EURUSD will likely remain bearish if these expectations don’t change.

EURUSD was essentially unchanged during the Asian and early European trading sessions. Today’s Fed decision and the FOMC Economic Projections report at 6:00 p.m. UTC will likely trigger above-normal volatility in all USD pairs. The market expects the Fed to leave the rates unchanged, but the main focus will be on the so-called ‘dot plot’.

The ‘dot plot’ shows how each Fed member projects the future path of the U.S. interest rates. If the overall monetary policy outlook features fewer rate cuts, EURUSD will likely drop, possibly below 1.08000. Conversely, EURUSD will rally, most likely above 1.09000, if the report is dovish and mentions more rate cuts.

USDCAD can break above 1.36100 if the Fed indicates fewer rate cuts

The lost 0.24% against the U.S. dollar on Tuesday after Statistics Canada showed a smaller-than-expected rise in core inflation.

Canada’s headline Consumer Price Index (CPI) unexpectedly slowed in February to just 2.8%, Canada’s statistics office reported yesterday. Core inflation rose by only 0.1%, the smallest rise in 2 years. The report immediately pushed USDCAD higher as investors started to price in a higher probability of a rate cut from the Bank of Canada (BOC) in June. ‘We expect central bankers will sound more dovish in April, thereby setting up a rate-cutting cycle beginning in June,’ said Royce Mendes, the head of macro strategy for Desjardins Group.

USD/CAD was rising during the Asian and early European trading sessions. Fundamentally, there is no divergence in investors’ interest rate expectations for both countries. The market expects the BOC to deliver 75 basis points (bps) worth of rate cuts in 2024 and anticipates roughly the same amount of rate reductions by the Federal Reserve (Fed).

However, today’s Fed decision may change traders’ expectations. The Fed will announce its interest rate decision and issue the latest FOMC Economic Projections at 6:00 p.m. UTC. Traders don’t expect the Fed to change the base rate. Market participants will closely monitor the so-called ‘dot plot’ section of the Economic Projections report for any clues about the future changes in interest rates.

If the overall monetary policy outlook features fewer rate cuts than was previously expected, USDCAD will likely rally, possibly above 1.36100. Conversely, USDCAD may experience a sell-off, most likely below 1.35000, if the report is dovish and mentions more rate cuts.