Gold tumbles from overbought levels

Gold prices were boosted on Wednesday after the US Fed scaled back its interest rate hikes but plummeted on Thursday as the dollar rebounded. Gold tumbled from a nine-month peak of $1,958 per ounce to $1,912 per ounce on Thursday, as it was trading in overbought territory. 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 rallied slightly on Thursday, after crashing on Wednesday. The dollar index climbed from 100.8 to 101.6, as markets had time to digest the Fed’s interest rate decision. US Treasury yields remained under pressure, with the US 10-year bond yielding below 3.40%.

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. After a series of aggressive rate hikes last year, the Fed has finally decided to relax its hawkish policy, boosting gold prices. The Federal Reserve raised interest rates by only 25 basis points at Wednesday’s meeting, bringing the benchmark interest rate to a target range of 4.50% to 4.75%. 

Fed Chair Jerome Powell, at his press conference after the conclusion of the meeting, defended the central bank’s decision to relax its hawkish policy. Powell expressed his satisfaction with the ‘disinflation’ process but emphasized that ongoing rate hikes are appropriate since substantial evidence is necessary that inflation is under control.

US inflation seems to be cooling, providing support for gold prices. Gold prices surge as the Fed and other central banks start to scale back their aggressive rate hiking. Even though inflation rates remain high, signs of cooling price pressures have reduced rate hike expectations, providing support for gold prices. Gold prices are in overbought territory though, as they trade close to levels reached only after the crisis in Ukraine started last year.

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Written by:
Myrsini Giannouli

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