Gold prices edged higher on Monday, touching $1,846 per ounce, as the US bond market remains closed. 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. Monday was a Bank Holiday in the US in observance of President’s Day and the dollar exhibited low volatility. The dollar index remained stable, fluctuating around the 103.9 level. US Treasury yields remained steady at last week’s closing levels, with the US 10-year bond yielding 3.8%.
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 versus the 6.2% expected. This represents a marginal cooling from December’s 6.5% print. PPI data also surprised markets to the upside last week. The monthly PPI for January rose by 0.7% against expectations of a 0.4% raise and a 0.2% drop in December.
January’s CPI and PPI inflation prints illustrate the danger of inflation becoming entrenched. Sticky inflation may induce the Fed to rethink its recent dovish pivot. 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. This means that there are likely still a couple of rate hikes up ahead, which may provide support for the dollar. 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.
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.
This week, important US fundamentals are also expected to affect gold prices. Flash Manufacturing and Services PMI data on Tuesday may cause volatility in gold prices ahead of the PCE inflation data later in the week.
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