Gold plummets as the dollar rallies

Gold prices plummeted on Monday, dropping to the $1,740 per ounce level. If gold prices decline, support may be found near $1,666 per ounce and further down at $1,703 per ounce. Resistance may be found at $1,785 per ounce and higher up at around $1,802 per ounce.

The dollar edged lower last week but gold prices remained flat, failing to take advantage of the dollar’s weakness, raising speculation that gold prices might have capped. The dollar index started the week off near the 107.7 level and then plummeted, closing near 106 on Friday. The dollar traded with low volatility at the end of the week, extending losses. US Treasury yields also weakened, with the US 10-year bond yielding over 3.8% at the beginning of the week and below 3.7% towards the end of the week.

The dollar slipped in early trading on Monday but gained strength later in the day. The dollar index climbed to 106.7 on hawkish Fed rhetoric. US Treasury yields also gained strength late on Monday, with the US 10-year bond yielding over 3.7%.

The minutes of the latest Fed meeting released last week indicated that there is no clear consensus among Fed members, leading to mixed signals for the markets. Fed rhetoric on Monday was hawkish once again though, boosting the dollar. Fed’s Williams stated that he sees higher interest rates into 2023 than previously anticipated and that he doesn’t expect rate cuts before 2024. FOMC member Bullard delivered an aggressively hawkish speech, emphasizing the need to raise interest rates to bring inflation down. Fed’s Mester also stressed that the US central bank is not close to a pause on tightening.

Market odds are currently between a 50-bps and a 25-bps interest rate increase in December. Gold prices are under pressure by the shift of most major Central Banks towards a tighter monetary policy to combat rising inflation rates. Assets yielding interest become a more appealing investment compared to gold as interest rates rise. 

US CPI and PPI inflation data in October were below expectations, indicating that inflation is cooling faster than expected. Annual CPI printed at 7.7%, compared to 8.2% in September and the 7.9% expected. Slowing price pressures may induce the Fed to pivot towards a more dovish policy reducing the aggressiveness of future rate hikes. Market expectations of future rate hikes were considerably trimmed after October’s inflation reports, causing the dollar to plummet. Slowing price pressures may induce the Fed to pivot towards a more dovish policy, reducing the aggressiveness of future rate hikes. 

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Written by:
Myrsini Giannouli

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