Gold prices fail to take advantage of dollar weakness

Gold prices were volatile on Tuesday, climbing to $1,750 per ounce early in the day, then paring gains and dropping back to $1,737 per ounce. If gold prices decline, support may be found near $1,666 per ounce and further down at $1,616 per ounce. Resistance may be found at $1,785 per ounce and higher up at around $1,802 per ounce.

Gold failed to take advantage of the dollar’s weakness on Tuesday. The dollar edged lower on Tuesday and although gold rose earlier in the day, it retreated, later on, raising speculation that gold prices might have capped. 

The dollar edged lower on Tuesday, as Fedspeak turned more cautious. The dollar index dropped from 107.7 in early trading, to 107.1 later in the day. US Treasury yields also declined, with the US 10-year bond dropping from 3.83% to 3.76%. 

Fed rhetoric is especially important this week as it may provide hints on the US central bank’s direction after recent soft inflation data. Fed rhetoric remained hawkish on Tuesday, although cautiously so, putting pressure on the dollar and boosting gold prices. 

FOMC member Mary Daly stated on Monday that a 75-bp rate hike is still on the table, emphasizing that one month’s cooling inflation print is not sufficient to pause rate hikes. Fed’s Loretta Mester reaffirmed on Tuesday that Maintaining price stability is a critical objective that will be accomplished using all available means. She stressed that interest rates should be increased further, but hinted at the possibility of a slower pace.

The consensus between FOMC members seems to be that although inflation is cooling, further tightening will be required to bring inflation down consistently to the central bank’s 2% target. Market odds are currently between a 50-bps and a 25-bps interest rate increase in December. Rate hikes are expected to taper off in 2023 as the central bank moves into a stable interest rate. Gold prices are under pressure by the shift of most major Central Banks towards a tighter monetary policy to combat rising inflation rates. Assets yielding interest become a more appealing investment compared to gold as interest rates rise. 

US CPI and PPI inflation data in October were below expectations, indicating that inflation is cooling faster than expected. Annual CPI printed at 7.7%, compared to 8.2% in September and the 7.9% expected. Slowing price pressures may induce the Fed to pivot towards a more dovish policy reducing the aggressiveness of future rate hikes. Market expectations of future rate hikes were considerably trimmed after October’s inflation reports, causing the dollar to plummet. Slowing price pressures may induce the Fed to pivot towards a more dovish policy, reducing the aggressiveness of future rate hikes. 

The US mid-term Congressional elections have put pressure on the dollar, but as markets digested the outcome of the elections, the dollar started to recover. Republicans eventually wrested control of the House from the Democrats, winning the elections with a narrow majority. The Democratic party has lost control of the Senate and will find it hard to push its economic and political agenda in the future.

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Written by:
Myrsini Giannouli

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