• Gold prices continue to trade in subdued fashion in the $1860s with markets in wait-and-see mode pre-Fed.
• A hawkish surprise could send the precious metal under $1850 and towards its 200DMA in the $1830s.
• The fact that XAU/USD is in a bearish trend channel makes any rally more difficult.

Spot gold (XAU/USD) prices are trading with an ever so slightly negative bias in the $1860s in the run-up to Wednesday’s Fed policy announcement, though conditions remain subdued with traders for the most part in wait-and-see mode. Ahead of a big market event that carries two-way volatility risk, traders tend to refrain from placing big bets, hence conditions like this are to be expected.

The Fed is expected to lift interest rates by 50 bps, signal rates hitting around 2.5% by the year’s end (meaning more 50 bps rate hikes are likely in the coming months) and announce balance sheet reduction plans. The main focus will be on the Fed’s rate guidance and any hints as to how high officials think the terminal rate might be, meaning there will be a lot of focus on Fed Chair Jerome Powell’s post-meeting press conference.

Any “hawkish” surprises could ignite further upside in the US dollar, which has been buoyant in recent weeks as traders priced in a more aggressive tightening cycle from the Fed. The US dollar’s strong performance in recent weeks (the DXY has rallied more than 3.5% in the last three weeks) has weighed heavily on gold, which is currently down nearly 7.0% versus its near-$2000 highs from just over three weeks ago. A stronger dollar makes USD-denominated commodities more expensive for international buyers, reducing demand.

Further USD upside would probably send gold to fresh multi-month lows under the $1850 mark and the gold bears would be eyeing a test of the 200-Day Moving Average in the mid-$1830s. Technicians have pointed out that XAU/USD remains locked within a bearish trendline, so even if the Fed isn’t as hawkish as feared and there is a small relief rally, it remains subject to being sold.