Gold prices extended Friday’s losses on Monday, pulling back to $1,735 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.
The collapse of the US dollar and yields boosted gold prices in the past couple of weeks. Diminishing Fed rate hike expectations have put pressure on US bond yields and dollar prices, bolstering gold prices. The dollar, however, is showing signs of recovering, raising speculation that gold prices might have capped.
The dollar rallied on Monday on increased risk aversion sentiment. The dollar index started below 107 on Monday but climbed to 108 during the day. US Treasury yields also started to recover, with the US 10-year bond climbing above 3.8%.
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.
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. 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.
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 last week, although cautiously so. 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.
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