Gold plummets after Fed hikes rates

Gold prices remained strong in early trading on Wednesday but plummeted after the highly-anticipated Fed meeting dropping below $1,635 per ounce. If gold prices decline, support may be found near $1,616 per ounce and further down at the 2020 low near $1,441 per ounce. Resistance may be found around 1,674 per ounce and higher up at $1,729 per ounce.

The USD was volatile after the conclusion of the Fed meeting, plummeting immediately after the announcement of the Federal fund rate and shooting upwards shortly afterward, with the dollar index rising above 112. US Treasury yields followed a similar pattern, exhibiting high volatility after the Fed meeting. The US 10-year bond was yielding above 4.0% until the announcement of the Fed meeting outcome, after which it dropped to 3.9 and then skyrocketed above 4.1%.

The US Federal Reserve decided to increase its interest rate by 75 basis points at its monetary policy meeting on Wednesday. The Fed has so far increased interest rates by a total of 375 basis points this year, bringing its benchmark interest rate to 4.0%. Wednesday’s rate hike of 75 bps was in line with expectations, however, and had already been priced in by markets. 

The FOMC Statement issued by the Fed contained a subtle change in forward guidance. The tone of Wednesday’s statement was more cautious than before, indicating that the Fed may be pondering slowing the pace of rate hikes. Market expectations are currently in favor of a 50-bps rate hike in December and a 25-bps hike in January. Rate hikes are expected to taper off in 2023 as the central bank moves into a stable interest rate.

The FOMC Statement raised some doubts about whether the US central bank was already considering a pivot in its monetary policy. Fed Chair Jerome Powell however, re-affirmed the Fed’s commitment to bringing inflation down. At the press conference following the monetary policy meeting, Powell stated that it would be very premature to think about pausing rate hikes, saying that "we still have some ways to go." 

High-risk aversion sentiment has been prevalent throughout the year and is increasing the safe-haven dollar’s appeal. At the same time, the Fed’s increase in interest rates is attracting investors who seek higher returns, boosting the dollar. 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.

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Written by:
Myrsini Giannouli

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