Gold weakens ahead of Fed rate decision

Gold prices edged closer on Tuesday, dropping to 2,150 per ounce, after rising to an all-time high of 2,190 per ounce last week. If gold prices increase, resistance may be encountered at $2,190 per ounce, while if gold prices decline, support may be encountered near $2,145 per ounce. 

Gold prices have experienced a meteoric rise in the past two weeks and are currently trading in overbought territory. 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 gained strength on Tuesday, with the dollar index climbing above the 103.8 level. US treasury yields remained steady, with the US 10-year bond yielding approximately 4.30%.   

The Fed’s policy meeting on the 20th will be the highlight of this week. The Fed kept interest rates unchanged at its latest monetary policy meeting within a target range of 5.25% to 5.50%. The Fed, however, has removed the tightening bias from its policy statement, indicating that the central bank is preparing to pivot to a less restrictive monetary policy, boosting gold prices.

For months now, markets have been speculating as to the timeline of the Fed’s pivot to a more dovish policy. Interest rates are expected to remain unchanged this month and the Fed’s first rate cut is priced in for June. Traders will focus especially on Fed Chair Jerome Powell’s speech after the meeting, to gain insight into the central bank’s policy outlook. 

Fed rate cut expectations are affecting gold prices. Fed officials wish to see more evidence of disinflation before moving ahead with cutting interest rates. The odds of a rate cut in March and May are practically nil. Rate cut odds in June are below 60% and only 25 basis points of rate cuts are priced in by June.  

Gold prices are propped up by rising geopolitical tensions, which raise the appeal of safe-haven assets. Concerns that the Geopolitical crisis in the Gaza area may spread to neighboring countries are raising demand for safe-haven assets, boosting gold prices. The war between Israel and Hamas is threatening to spill over the Middle East as tensions rise in the Red Sea area.

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Written by:
Myrsini Giannouli

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