'Hawkish Pause' Increasing Downside Risks for Gold

Bears Calling For USD Drop Over recent months, a lot of major players have been calling for a shift lower in USD premised on the end of the Fed tightening cycle which has been in place across the second-half of the post-pandemic recovery. The view is that all of the USD bullishness built up across the last year and a half of tightening would start to unwind as the Fed cools away from rate hikes. Indeed, earlier this year, market pricing was switching in favour of expecting rate cuts from the Fed later in the year, despite its own projections that further tightening would be needed.US Economy Showing ResilienceHowever, with the US economy proving far more resilient than initially thought, the Fed’s own outlook has started to shift. While a move in favour pausing rates certainly looks to be taking place among policy members its comes with the caveat that 1) further tightening might still be needed and 2) even if rates are held unchanged, they will have to stay at higher levels for longer to ensure CPI moves back down to target.Bullish USD RisksThis shift is important because it potentially creates a base for USD to remain firmer for longer. With the market wary that the Fed might hike rates again if inflation spikes or the labour market is running too hot, this will keep bullish USD risks alive through the summer at least. As such, gold prices look vulnerable to a deeper correction lower in coming months if we do see USD trading higher.Technical ViewsXAUUSDThe reversal lower in gold prices has seen the market breaking down through support at the 1973.51 level and through the bull channel lows. While below this area, the focus is on a continuation lower towards the next support zone around 1871.04 and 1805.18 below that. Only a firm break back above the 1973.51 level will negate the bearish bias.