• The price of gold rose after the Federal Reserve cut interest rates by a double dose of 50 basis points.
• The precious metal failed to maintain its gains and fell sharply, but rebounded again on Thursday.
• The constrained upside potential for gold prices may be due to the Fed’s overall assessment of the US economy as doing well.

Gold (XAU/USD) rose slightly on Thursday to return to $2,580 after falling to $2,540 on the back of the US Federal Reserve (FED) interest rate decision.

The yellow metal hit a up-to-date record high of $2,600 on Wednesday before quickly falling following the much-anticipated Fed meeting, which decided to cut the federal funds rate by 50 basis points (0.50%). This lowers the Fed’s base rate to a range of 4.75%-5.25% from the previous 5.25%-5.50%.

Gold peaks after Fed meeting

Gold hit a record high of $2,600 after the Fed cut interest rates by 50 basis points on Wednesday, although the yellow metal failed to sustain its up-to-date highs. Several analysts attributed the lack of volatility (the prices of financial assets changed only little after the announcement) to the Fed’s easing cycle, which had already been priced in by financial markets ahead of the event.

“Is an easing cycle already priced in?” Thomas Mathews, Head of Markets, Asia Pacific for Capital Economics, said in a note on Thursday. “Markets have barely reacted to the Fed’s 50 basis point rate cut, overall, and our baseline view is that further cuts won’t change much either.”

The gold price rally may have been constrained by the Fed’s broadly spotless bill of health for the U.S. economy. Gross domestic product (GDP) growth forecasts were revised only slightly down to 2.0% in 2024 from 2.1% previously, and are expected to remain at that level through the end of 2027.

“This was accompanied by a larger decline in the signal of a fundamentally strong (U.S.) economy, with no suggestion that a further 50 bps cut is likely,” said Jim Reid, Global Head of Research at Deutsche Bank. “Growth forecasts were little changed, and the scatterplot showed that the median FOMC member expected federal funds to be in the 4.25%-4.50% range by year-end.”

Labor market weakness appears to be the Fed’s primary concern right now. The central bank has raised its unemployment rate forecast to 4.4% in 2024-25 and is predicting it won’t fall to 4.2% until tardy 2027. From there, markets will likely focus on how well the labor market is doing.

But even the situation on the labor market is not yet grave enough for gold to become a secure haven.

“Unemployment claims are still very low, nothing compared to what you would see in a recession, and even the rates of resignations and JOLTS are still higher than they have been in a decade,” said Janet Henry, global economist at HSBC. The higher unemployment rate was partly due to high immigration into the US, she added, not inherent weakness.

Henry said labor market indicators are lagging, so there is a risk of unpleasant surprises in the future.

“If we get a shock payroll data in November, we could go back to talking about another 50 basis point cut,” the economist said in an interview with Bloomberg News.

Technical Analysis: Gold Recovers After Pullback

Gold is recovering from a volatile 24-hour period in which it rose to a up-to-date high of $2,600 but then fell to a low of $2,540. It is currently bouncing off the low and is almost a percentage point higher on the day at the time of writing on Thursday.

According to the principle of technical analysis that “the trend is your friend”, the chances of growth are greater in line with dominant long-term, medium-term and short-term uptrends.

It is possible that the gold price correction will be longer, but the overall trend is upwards.

XAU/USD Daily Chart

According to the Relative Strength Index (RSI), gold is still not overbought on the daily chart, which also leaves room for further growth.

If it breaks above $2,600, it will print a higher high and confirm that the uptrend continues. The next target above that will be round numbers: $2,650 and then $2,700.

However, if the gold RSI indicator closes the session and enters the overbought zone, investors will not need to escalate their long positions.

If you enter and exit in an overbought position, it will be a signal to close your long positions and sell as it may suggest that a deeper correction is taking place.

If the correction extends, forceful support will be found at $2,550, $2,544 (0.382 Fibonacci retracement of the September rally) and $2,530 (previous range high).