Gold dips as Fed point to further tightening

Gold prices dipped on Wednesday, touching $1,824 per ounce, on higher Fed rate hike expectations. If gold prices increase, resistance may be encountered near $1,875 per ounce, while if gold prices decline, support may be found near $1,818 per ounce. Gold prices have been following a downtrend this month, pushed down by the rising dollar and strengthening US treasury yields.

Gold prices have been predominantly directed by the dollar’s movement, as the competing gold typically loses appeal as an investment when the dollar rises. The dollar rallied on Wednesday on hawkish Fed minutes and the dollar index was catapulted above 104.5. US Treasury yields remained stable, with the US 10-year bond yielding above 3.95%. 

The minutes of the latest Fed meeting were released on Wednesday and were more hawkish than expected, boosting the US dollar and yields at the expense of gold prices. The minutes confirmed that FOMC members believe there is still more work to tackle inflation. Even though FOMC members were in favor of reducing the pace of rate hikes, a pause in the central bank’s tightening policy does not seem to be on the cards just yet.

The Federal Reserve raised interest rates by only 25 basis points at its February meeting, bringing the benchmark interest rate to a target range of 4.50% to 4.75%. Rate hikes have become less aggressive and may continue at their current pace, but the Fed might raise interest rates for longer than previously expected. Current market odds lean towards further tightening in the upcoming Fed meetings and an increase in interest rates up to 5.25%. Increases in central banks’ interest rates put pressure on gold prices since assets yielding interest become a more appealing investment compared to gold as interest rates rise.

Last week, US inflation data showed that price pressures remain high and are not easing at the anticipated pace. US headline inflation in January dropped to 6.4% year-on-year from December’s 6.5% print. January’s inflation prints illustrate the danger of inflation becoming entrenched. Sticky inflation may induce the Fed to rethink its recent dovish pivot. 

This week, important US fundamentals are also expected to affect gold prices. Preliminary Quarterly US GDP data are scheduled to be released on Thursday, which will provide important information on the US economic outlook and may affect gold prices.

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Written by:
Myrsini Giannouli

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