Gold prices soar on diminished Fed rate hike expectations

Gold prices soared after the Fed rate decision on Wednesday, touching $1,980 per ounce. If gold prices increase, resistance may be encountered near $1,987 per ounce, while if gold prices decline, support may be found near $1,945 per ounce.

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. The U.S. Federal Reserve raised interest rates by 25 basis points on Wednesday after holding its interest rate steady at its June policy meeting. Fed officials voted unanimously on Wednesday to raise the central bank’s interest rate to a target range of 5.25% to 5.50%, the highest level in 22 years. 

The Fed’s decision to resume economic tightening, however, was widely anticipated and had already been priced in by markets. The dollar dropped sharply after the Fed announcement and gold prices soared. 

The dollar’s movement has predominantly directed gold prices, as the competing gold typically loses appeal as an investment when the dollar rises. The dollar plummeted on Wednesday after the Fed rate announcement and the dollar index dropped below the 101 level. US Treasury yields also declined on reduced future rate hike expectations, with the US 10-year bond dropping to 3.85%.

The Fed’s forward guidance remained the same, stressing that future steps would be determined by several parameters, including the cumulative effect of tightening on the economy, the progress of inflation, as well as other financial developments. The Fed’s message was ambiguous, aiming to give the central bank flexibility towards adjusting its future monetary policy and adopting a data-dependent approach. 

There is considerable doubt on whether the Fed will continue hiking rates after this week’s rate increase. Cooling US inflation rates have shifted market expectations towards a less hawkish direction, boosting gold prices.

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Written by:
Myrsini Giannouli

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