Gold prices withdrew on Thursday, as the US dollar and yields started to recover. Gold edged lower, dropping to the $1,755 per ounce level. 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 $1,765 per ounce and higher up at around $1,802 per ounce.
The collapse of the US dollar and yields caused gold prices to skyrocket last week. The dollar bounced back on Thursday though, on increased political stability and hawkish Fedspeak. The dollar index was just above 106 in early trading but climbed above 107 during the day. US Treasury yields also edged higher, with the US 10-year bond touching 3.8%. Diminishing Fed rate hike expectations are putting pressure on US bond yields and dollar price, which had been trading in the overbought territory over the past few months.
The US mid-term Congressional elections last week have put pressure on the dollar. Political instability over the past week has pushed the dollar down. As markets began to digest the outcome of the elections on Thursday though, the dollar started to recover. The results of the elections were close, with the votes being tallied for a week. 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. Earlier this week, former US President Donald Trump announced that he would run again for President in the 2024 US elections.
US Monthly CPI in October rose by only 0.4% against predictions of 0.6%. Annual CPI printed at 7.7%, compared to 8.2% the previous month 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. On Tuesday, PPI data confirmed that US inflation is cooling faster than expected, causing the dollar to plummet. Monthly PPI for October printed at 0.2%, against expectations of 0.4%. Monthly Core PPI, which excludes food and energy, was stagnant, versus a 0.3% rise predicted and a 0.2% rise in September.
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. The US Federal Reserve voted to increase interest rates by 75 basis points at its latest monetary policy meeting.
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 this 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.
Market expectations of future rate hikes were considerably trimmed after last week’s inflation report and were further diminished after Tuesday’s inflation print. 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.
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