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Summary: The minutes of the Federal Open Market Committee (FOMC) meeting held from May 2nd to 3rd, released yesterday, reiterated that containing inflation remains the Fed's primary objective. Gold prices are gaining support from mixed signals around the U.S. debt ceiling extension negotiations, but further upside remains limited.

Fundamentals

The FOMC minutes reiterated that containing inflation remains the Fed's primary objective. Regarding current economic conditions, committee members noted that "economic activity had expanded at a modest pace in the first quarter. Nonetheless, job gains had been robust in recent months, and the unemployment rate had remained low. Inflation remained elevated. Participants agreed that the U.S. banking system was sound and resilient."

In discussing credit conditions, participants noted that "stress in the banking sector would, in coming quarters, likely induce banks to tighten lending standards by more than they would have in response to higher interest rates alone." However, participants noted that the economic impact is uncertain at this time.

On the future path of monetary policy, members said that "in light of the lagged effects of cumulative tightening in monetary policy and the potential effects on the economy of a further tightening in credit conditions, the extent to which additional increases in the target range may be appropriate after this meeting had become less certain." Some participants noted, however, that future rate increases may not be necessary if the economy develops in line with their current forecasts.

In discussing factors that may influence future policy decisions, participants noted that "the degree and timing with which cumulative policy tightening restrained economic activity and reduced inflation, with some participants commenting that they saw evidence that the past years' tightening was beginning to have its intended effect."

On the market side, yesterday's minutes confirmed that further rate hikes will depend on upcoming data. While showing some early signs of easing, inflation remains well above target, and the economy continues to add jobs at an above-trend pace. This has led to divergent views among FOMC members on the future path of the federal funds rate. Financial markets have adjusted their views on the federal funds rate and expect a rate cut of about 50 basis points by year-end, compared to 75 basis points two weeks ago. This uncertainty is reflected in the volatility of U.S. 2-year Treasuries, which have risen more than 50 basis points since the beginning of May.

While the recent tightening of credit conditions due to banking sector stress is expected to put pressure on economic growth, the overall impact remains somewhat uncertain. It is for this reason that the FOMC may pause its tightening actions when it meets next month, as they try to better assess the cumulative impact of last year's 500 basis points of tightening.

On the other hand, the recent decline in U.S. Treasury yields and the U.S. dollar's retreat due to the stalemate in debt ceiling negotiations have also weighed on gold's performance. Hopes of avoiding a U.S. debt default underpinned the bearish sentiment around gold. Market sentiment remains subdued as traders brace themselves for these key events.

Heading into Thursday's European session, with the mixed signals surrounding the extension of U.S. debt limit negotiations and the Fed, the tug-of-war between gold's bulls and bears near the key support of $1,955 illustrated the market's indecisiveness. We believe that prices will not break lower in gold before the end of the month and that a longer tug-of-war will hold for some time.

Technical Analysis

With gold prices continuing to retreat from the range high of $1985, downside risks remain. Short-term technical indicators point to more market weakness.

Looking at the 4-hour chart, gold is blocked by resistance at $1,985, which is the 23.6% Fibonacci retracement of the move down from $2,079 to $1,952. The Relative Strength Index is pointing below the neutral-50 level, while the MACD is in the negative 0-axis territory.

The next downside target for the bears is the support at $1,952. Below that level, the market could see a resumption of the downtrend, and support could be found at $1,935 before testing the fair price of $1,909.

On the other hand, an uptrend could further fall back after a brief breakthrough to $1,990. It is important to note that if the psychological barrier of $2,000 is broken again, the downward trend is invalidated.

Overall, in the short term, both bearishness and support are in play at the same time. In this case, consolidation of the recent gains will become exceptionally intense. It is recommended to buy low and sell high within the range.

Trading Recommendations

Trading Direction: Long

Entry Price: 1960

Target Price: 1990

Stop Loss: 1940

Valid Until: 2022-06-08 23:55:00

Support: 1952, 1950, 1944

Resistance: 1976, 1985, 1993