Gold volatile as markets readjust rate hike expectations

Gold prices exhibited high volatility on Wednesday. Gold prices shot upwards after the release of the US CPI data touching $2,048 per ounce but deflated later in the day, dropping below $2,030 per ounce. If gold prices increase, resistance may be encountered near $2,081 per ounce, while if gold prices decline, support may be found near $1,976 per ounce. 

On Wednesday, US Consumer Price Index data showed that headline inflation dropped to 4.9% year-on-year in April, decelerating from a 5.0% print in March. US Inflation cooled more than expected in April, as markets were anticipating a 5.0% print. Gold prices spiked after the release of the CPI data, as slowing inflation increased the chances that the Federal Reserve could pause its interest rate hikes. 

The Federal Reserve signaled a pause in rate hikes last week, boosting gold prices. The Federal Reserve raised interest rates by 25 basis points at its monetary policy meeting last week, bringing the benchmark interest rate to a 16-year high target range of 5.00% to 5.25%. Many analysts predict that there is a high probability of rate cuts starting in November. Expectations of a pivot to a more dovish policy provide support for gold prices.

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 dipped on Wednesday after the release of US CPI data, with the dollar index dropping to 101.3. US Treasury yields declined on increasing expectations of a pause in US rate hikes and the US 10-year bond yield dropped to 3.44%. 

Increased risk aversion sentiment also provides support for gold prices. The recent crisis in the banking sector caused risk sentiment to plummet, raising the appeal of safe-haven assets. Fears of a banking sector meltdown enhance gold’s haven status.

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Written by:
Myrsini Giannouli

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