Gold prices plummeted on Tuesday on hawkish Fed rhetoric, dropping below $1,814 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 $1,804 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 rallied on Tuesday, with the dollar index rising to 105.6. US Treasury yields also advanced on higher Fed rate hike expectations. The US 2-year bond yield climbed to its highest level since 2007, while the US 10-year bond yield rose to 4%.
Fed rhetoric is expected to affect gold prices this week. Fed Chair Powell testified before the Senate Banking Committee on Tuesday and his speech was more hawkish than anticipated, boosting the dollar. Powell stated that although inflation has cooled somewhat, the process of getting back to the Fed’s 2% target rate will “likely be bumpy”. Powell warned that the US central bank is prepared to accelerate the pace of tightening if price pressures remain high. Powell also indicated that the Fed’s terminal rate will likely be higher than anticipated.
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%. In light of Powel’s speech, however, markets have adjusted Fed rate hike expectations from a 25-bp raise to a 50-bp increase in March. Market expectations of the Fed’s peak rate have also increased, moving to a range of 5.5%-5.75%. 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.
Powell will appear before Congress again on Wednesday to continue his address on the Fed’s Semi-annual Monetary Policy Report. Increased volatility in gold prices is expected, especially in light of the market volatility caused by his testimony on Tuesday.
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