Gold boosted by reduced Fed rate hike expectations

Gold prices went up on Tuesday, supported by reduced rate hike expectations. Gold fell to $1,900 per ounce in early trading, but rallied later in the day, climbing above $1,930 per ounce. 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 dipped on Tuesday as market odds leaned towards a low Fed rate hike on Wednesday and the dollar index dropped to the 102 level. US Treasury yields also declined slightly on reduced rate hike expectations, with the US 10-year bond yielding approximately 3.52%.   

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. The Fed monetary policy meeting on Wednesday will likely affect gold prices considerably. Market odds are currently in favor of a moderate 25-bp rate hike and the dollar will be under pressure if the Fed shifts towards a more dovish policy, boosting gold prices. Market participants will also be paying close attention to the Fed’s guidance through Fed Chair Jerome Powell’s press conference after the conclusion of the meeting.

US inflation seems to be cooling, providing support for gold prices. Cooling price pressures may give the US Federal Reserve some leeway towards scaling back its interest rate increases, boosting gold prices. As the Fed and other central banks start to scale back their aggressive rate hiking, gold prices surge.

Gold has been in a bullish trend for the last couple of months, which is likely to continue if the Fed signals a pause in raising interest rates. Even though inflation rates remain high, signs of cooling price pressures have reduced rate hike expectations, providing support for gold prices. Gold prices are approaching 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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