Gold’s rally was halted on Monday. Gold traded with low volatility as markets await the Fed policy meeting on Wednesday. Gold prices retreated from last week’s 9-month high of $1,949 per ounce, touching $1,920 per ounce on Monday. If gold prices continue to increase, resistance may be encountered near $1,950 per ounce, while if gold prices decline, support may be found near $1,896 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 edged higher on Monday, as markets weighed Fed rate hike odds and the dollar index climbed above 102.3. US Treasury yields also rose a little, with the US 10-year bond yielding approximately 3.55%.
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 Fed monetary policy meeting this week on February 1st will likely affect gold prices considerably. Market odds are currently split between a 50-bp rate hike and a more moderate 25-bp rate hike this week. A potential Fed shift towards a more dovish policy will likely boost gold prices further.
US inflation seems to be cooling, providing support for gold prices. Cooling price pressures may give the US Federal Reserve some leeway towards scaling back its interest rate increases, boosting gold prices. Gold prices surge as the Fed and other central banks start to scale back their aggressive rate hiking.
Gold has been in a bullish trend for the last couple of months, which is likely to continue if the Fed signals a pause in raising interest rates. Even though inflation rates remain high, signs of cooling price pressures have reduced rate hike expectations, providing support for gold prices. Gold prices are approaching overbought territory though, as they trade close to levels reached only after the crisis in Ukraine started last year.
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