Gold prices stay firm despite rising US treasury yields

Gold prices hit an all-time high of $2,942 per ounce on Tuesday but have encountered selling pressure since. Gold prices dropped below $2,870 per ounce after the release of the US inflation report on Wednesday but pared losses later, regaining the $2,900 per ounce level. If gold prices rise, they may encounter resistance at the psychological level of $2,950 per ounce, while if gold prices decline, support may be encountered near $2,770 per ounce. 

Gold prices reached a new all-time high of $2,942 per ounce on Tuesday. Gold’s rally was halted later on Tuesday, on profit taking. Gold prices dropped sharply after the release of the US inflation report on Wednesday, but rallied later, as increased safe-haven demand outweighed rising US treasury yields and decreased Fed rate cut expectations. 

Gold prices have been typically directed by the dollar’s movement, as the competing gold loses appeal as an investment when the dollar rises. The dollar exhibited high volatility on Wednesday after US inflation data surprised on the upside. The dollar index surged from 107.9 to 108.4 after the release of the US inflation report but came back down to 107.9 later in the day as markets had time to digest the news. US treasury yields gained strength, with the US 10-year bond yield rising from 4.55% to 4.63%.      

US inflation data released on Wednesday were hotter than anticipated, indicating that inflationary pressures are on the rise and lowering Fed rate cut expectations. Headline inflation rose by 3.0% year-on-year in January after rising by 2.9% in December against expectations of a 2.9% print. Monthly inflation rose sharply by 0.5% in January after rising 0.4% in December against a 0.3% rise anticipated. Core CPI, which excludes food and energy, rose by 0.4% in January, exceeding expectations of 0.3% and following a 0.2% rise in December. Core CPI rose 3.3% year-on-year in January, against 3a .2% gain in December.

Gold prices are under pressure by decreased Fed rate cut expectations. The US Federal Reserve held interest rates steady at its January meeting after delivering three consecutive rate cuts in 2024. FOMC policymakers voted unanimously to maintain the federal funds range to a target range of 4.25% to 4.50%. Market odds of another rate cut dropped after the release of the US inflation report on Wednesday. Markets are pricing in only a single 25bps rate cut within the year as inflationary pressures remain high.

Fed Chair Jerome Powell delivered a mildly hawkish message after the policy meeting, putting pressure on gold prices. Powell stated that the Fed’s approach will remain data-driven and stressed that the central bank needs to consider potential policy changes under Trump’s administration. 

On Tuesday, Powell testified about the Semi-Annual Monetary Policy Report before the Senate Banking Committee. Powell’s speech was hawkish, hinting that the Fed may pause rate cuts for some time. Powell stated that the US economy is robust, while at the same time, inflation remains elevated, indicating that interest rates will remain at restrictive levels for longer than originally anticipated. Powell refused to comment on how the new US government’s tariff policies are affecting the US economy and the pace of monetary policy normalization but stated that the US President is forbidden by law to remove a Fed board member. Powell completed his two-day semiannual Monetary Policy Report on Wednesday, with a testimony before the House Financial Services Committee. Powell stressed that the battle against inflation is ongoing and stated that he does not intend to resign if asked to by Trump.

Uncertainty over US President Donald Trump’s future policies and trade tariffs promotes a risk aversion sentiment, raising the appeal of safe-haven assets, such as gold. Concerns that Trump’s trade policies may ignite global trading wars are raising the appeal of gold. 

US President Donald Trump has been using threats of imposing trade tariffs as a negotiation tool to further his agenda with other countries. Trump has threatened that he will announce reciprocal tariffs on many countries, which would raise US import taxes to match those imposed by the country’s other trading partners. On Monday, Trump announced a 25% tariff on steel and aluminum imports for all countries importing into the US, raising concerns over global trade wars. If Trump goes through with these heavy tariffs, global inflation is likely to rise and the economic outlook will worsen, thus promoting a risk aversion sentiment that boosts safe-haven assets.

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Written by:
Myrsini Giannouli

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