Gold tumbles on hawkish Fed

Gold prices tumbled on Thursday, dropping to the $1,860 per ounce level. 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 $1,825 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 Thursday, with the dollar index dropping to 103.1. US Treasury yields also retreated, with the US 10-year bond yielding close to 3.62%.

Fed rhetoric this week remained hawkish. The initial market interpretation of Fed members’ speeches was ambiguous, as markets have been anticipating a pause in rate hikes after the Fed’s next policy meeting. Repeated speeches by Fed members though have begun to drive the message home that further rate rises should be expected and that interest rates will need to remain high for a long period. 

On Wednesday, FOMC member Williams emphasized that a restrictive stance must be maintained for a few years but did not commit to a specific ceiling for the Fed’s interest rates this year. Fed’s Cook on Wednesday was more hawkish, stating that the central bank aims to restore price stability, which will require a restrictive monetary policy for some time.

Last week Fed Chair Jerome Powell expressed himself as satisfied with the ‘disinflation’ process but stressed that ongoing rate hikes are appropriate to bring inflation under control. On Tuesday, Powell confirmed that the disinflation process has begun but emphasized that it still has a long way to go. Powell’s speech was cautious, reinforcing that the Fed’s decisions will be based strongly on disinflation rates and the state of the US economy.

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. After a series of aggressive rate hikes last year, the Fed has finally decided to relax its hawkish policy, boosting gold prices. The Federal Reserve raised interest rates by only 25 basis points last week, bringing the benchmark interest rate to a target range of 4.50% to 4.75%. 

US inflation seems to be cooling, providing support for gold prices. Gold prices surge as the Fed and other central banks start to scale back their aggressive rate hiking. Even though inflation rates remain high, signs of cooling price pressures have reduced rate hike expectations, providing support for gold prices. 

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Written by:
Myrsini Giannouli

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