Gold prices edged lower on Tuesday, touching $1,830 per ounce, on higher Fed rate hike expectations. 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. The dollar soared on Tuesday, boosted by robust US economic data, and the dollar index was catapulted above 104.2. US Treasury yields also strengthened, with the US 10-year bond yielding above 3.95%.
US inflation data last week showed that price pressures remain high and are not easing at the pace anticipated. US headline inflation in January dropped to 6.4% year-on-year from December’s 6.5% print. January’s 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.
This week, important US fundamentals are also expected to affect gold prices. FOMC Meeting Minutes are scheduled to be released on Wednesday and may provide additional information on the Fed’s future policy direction.
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