For a long time, the markets fought the Fed, claiming that the the central bank will make a "dovish" turn in 2023. Now the markets are asking the Fed to compete with statistics. If the decisions of Jerome Powell and his colleagues are still dependent on data, then will worsening force them to abandon the idea of keeping the federal funds rate at a peak of 5% until the end of 2023? Will there come a time when a significant slowdown in inflation will change the outlook of the Fed? The further it is, the worse it is for gold.

The precious metal had its best start since 2012, thanks to falling Treasury yields and a weaker U.S. dollar. Investors ignored the loud statements of FOMC officials that the work is not yet over, and rates will continue to rise. Markets still believe in their decline this year, which undermines the strength of the USD index. Growing recession risks increase the demand for debt securities and contribute to the fall in their yields. At the same time, stock indices, excited by the news about the imminent end of the Fed's monetary policy tightening cycle, are rising. Tailwinds for the U.S. dollar have become headwinds, and XAUUSD is taking full advantage of this.

Dynamics of expected Fed and ECB rate cuts

Along with the change in the paper gold market, the positions of the physical asset are strengthening. In 2022, China imported 524 tons from Switzerland worth about $33 billion, the highest level since 2018 and significantly more than 354 tons in 2021. At the same time, China increased purchases of precious metals in Russia to 6.6 tons, which is 22% more than a year earlier.

Expectations of a "dovish" reversal of the Federal Reserve, deterioration of macroeconomic statistics in the U.S., which suggests a loss of American exceptionalism, and strong demand from China paint a rosy outlook for XAUUSD. However, risks remains.

No one really knows whether the reopening of China's economy will do more good than harm. Growth in demand for raw materials is fraught with higher prices and rising inflation. The Fed, looking at new PCE local highs, will be forced to accelerate the process of tightening monetary policy. The U.S. economy can't handle it. At the same time, an energy crisis will return to Europe amid the resumption of the gas rally. Investors will again talk about the recession, which will weaken the euro. The USD index will rise, and gold will start to fall.

Thus, the markets can go from euphoria to caution at any time. The question is, when exactly? While optimism reigns in the ranks of investors, the precious metal feels like a fish in water amid a weakening dollar and falling U.S. Treasury yields.

Technically, there is a steady upward trend on the daily gold chart. If the precious metal manages to go beyond the upper limit of the fair value range of $1,838–$1,943 per ounce, the risks of continuing the rally in the direction of $2,000 will increase. In such a situation, it makes sense to buy at the breakout of resistance or a rebound from the supports $1,907–$1,915 and $1,894–$1,899.