Gold retreats from all-time high as dollar rallies

Gold prices have been hitting new all-time highs in the past couple of weeks. Gold prices rose to a record high of $2,365 per ounce on Tuesday but retreated to $2,330 per ounce on Wednesday, as the rivalling dollar rallied. If gold prices increase, resistance may be encountered at the psychological level of $2,400 per ounce again, while if gold prices decline, support may be encountered near $2,270 per ounce. 

Gold prices have experienced a meteoric rise recently and are trading in overbought territory. Gold prices have been benefiting from increased geopolitical risks, as well as from the rivaling dollar’s weakness. 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 rallied on Wednesday on hotter-than-expected US inflation, and the dollar index surged to the 105.2 level. US treasury yields also rose on diminishing Fed rate cut expectations, with the US 10-year bond yielding approximately 4.56%.  

The US Federal Reserve kept interest rates unchanged at its latest policy meeting within a target range of 5.25% to 5.50%. The Fed’s forward guidance was overall dovish, boosting gold prices. For months now, markets have been speculating as to the timeline of the Fed’s pivot to a more dovish policy. Fed officials wish to see more evidence of disinflation before moving ahead with cutting interest rates. 

US inflation surprised on the upside on Wednesday, rising by 3.5% year-on-year in March exceeding February’s 3.2% print and rising above expectations of a lower print of 3.4%. Monthly CPI rose by 0.4% in March, against expectations of 0.3% growth. Core CPI, which excludes food and energy, also rose by 0.4% against the 0.3% raise anticipated. Inflation in the US has proven to be sticky, resisting the Federal Reserve’s efforts to bring it down to its 2% target. US PPI data on Thursday will provide a clearer picture of the direction of US inflation and are likely to affect gold prices as they may influence the Fed’s policy outlook.

Fed rate cut expectations are affecting gold prices. Market expectations of rate cuts dropped sharply after the release of the US inflation report on Wednesday. Odds of a rate cut in May are practically nil. Rate cut odds in June are down to 15% from 50% just a few days ago, while odds of a rate cut in July have dropped below 40%. Market expectations of rate cuts are becoming more moderate as policymakers have stated that they intend to start reducing interest rates slowly. 

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. Over the weekend, however, there were signs of de-escalation. Peace talks are underway in Egypt and Israel removed troops from Southern Gaza. The ongoing conflict between Russia and Ukraine is also propping up gold prices. Ukrainian drones have recently attacked one of Russia’s largest oil refineries, reportedly causing the loss of Russian refinery capacity.

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Written by:
Myrsini Giannouli

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