Gold prices rise as the dollar deflates

Gold prices rose above the key $2,000 level on Thursday as the US dollar and treasury yields weakened. If gold prices increase, resistance may be encountered near $2,065 per ounce, while if gold prices decline, support may be encountered near $1,972 per ounce. 

The dollar’s movement has predominantly directed gold prices, as the competing gold typically loses appeal as an investment when the dollar rises. The dollar retreated on Thursday, with the dollar index dropping to the 104.3 level. US treasury yields edged lower on Thursday, with the US 10-year bond yielding approximately 4.23%.       

US Headline inflation rose by 3.1% year-on-year in January from a 3.4% print in November against expectations of a much lower reading of 2.9%. Markets were anticipating a sharp drop in inflation in January, which was not realized, dashing expectations of early Fed rate cuts, and putting pressure on gold prices. Monthly CPI rose by 0.3% in January, exceeding expectations of a 0.2% print. Core CPI, which excludes food and energy, rose by 0.4%, its higher monthly growth since June, against expectations of a 0.3% raise. Inflation in the US remains sticky and may put pressure on the Fed to keep interest rates at high levels for longer. 

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.

Rate cut expectations have fluctuated strongly in the past couple of weeks, affecting gold prices. Odds of a rate cut in March dropped to 7% after the release of the US inflation data, from over 50% two weeks ago. Rate cut odds in May are also down to 30% from over 80% a few weeks ago. 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. The war between Israel and Hamas is threatening to spill over the Middle East as tensions rise in the Red Sea area, while the US and the UK have launched a coordinated action against Houthi rebels in Yemen. 

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Written by:
Myrsini Giannouli

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