Gold prices dipped on Wednesday on increased Fed rate hike expectations, dropping to $1,833 per ounce. If gold prices increase, resistance may be encountered near $1,890 per ounce, while if gold prices decline, support may be found near $1,825 per ounce.
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 soared on Wednesday, propelled upwards by positive US economic activity data and the dollar index climbed above 104. US Treasury yields also moved upwards on renewed Fed rate hike expectations, with the US 10-year bond yielding over 3.8%.
US CPI data on Tuesday showed that price pressures remain high and are not easing at the pace anticipated. US headline inflation in January dropped to 6.4% year-on-year versus the 6.2% expected. This represents a marginal cooling from December’s 6.5% print.
Cooling price pressures in the past few months gave the US Federal Reserve some leeway towards scaling back its interest rate increases, putting pressure on the dollar. 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%.
January’s CPI print though illustrates the danger of inflation becoming entrenched, which may force the Fed to rethink its recent dovish pivot. 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.
Fedspeak over the past week has been hawkish, emphasizing that further rate rises should be expected and that interest rates will need to remain high for a long period. On Tuesday, Fed’s Williams emphasized that rates still have higher to go and they will have to be kept high for some time. Fed's Bowman stated on Monday that the UC central bank aims to raise interest rates to bring inflation down below 2%.
Fed Chair Jerome Powell has stated that the disinflation process has begun but warned that it still has a long way to go. The Fed’s stance appears to be cautiously optimistic, reinforcing the notion that the Fed’s decisions will be based strongly on disinflation rates and the state of the US economy.
US inflation data on Thursday are expected to cause volatility in gold prices. After Tuesday’s CPI data, Producer price (PPI) data on Thursday will help paint a clearer picture of US inflation and will also likely affect gold prices.
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