Gold rally paused as the dollar rebounds

Gold prices climbed to their highest level since April last week, as soft US inflation print put pressure on the dollar. Gold prices continued to advance in early check on Monday, but their rally was halted later in the day, as the dollar rebounded. Gold prices climbed as far as $1,928 per ounce, before dropping back by $1,915 per ounce. If gold prices continue to increase, resistance may be encountered near $2,000 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 plummeted last week after the release of the highly-anticipated US inflation report. The dollar extended losses in early trading on Monday, with the dollar index retreating to 101.8, but rallied later in the day, rising above 102.5. 

US Treasury yields remained unchanged on Monday, with the US 10-year bond yielding approximately 3.5%. Monday was a Bank holiday in the US for Martin Luther King Day and no fundamentals were released for the dollar.

US headline inflation dropped to 6.5% year-on-year in December from 7.1% in November. The soft inflation print put pressure on the dollar and gold prices soared, as cooling price pressures may give the US Federal Reserve some leeway towards scaling back its interest rate increases. Gold prices are approaching overbought territory though, as they move closer to levels reached only after the crisis in Ukraine started last year.

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. Several major Central Banks, such as the Fed, the ECB, and the BOE raised interest rates considerably in the past year. A worldwide wave of fiscal tightening has been driving gold prices down.

Gold prices surge as the Fed and other central banks start to scale back their aggressive rate hiking. Gold has been in a bullish trend for the last couple of months, which is likely to continue if the Fed signals a pause in raising interest rates.

Increased global recession concerns, however, raise the appeal of gold as an investment. In China, prolonged Covid lockdowns have dealt a significant blow to the economy. A diminishing economic outlook may force central banks around the world to pivot to a more dovish fiscal policy. Even though inflation rates remain high, signs of cooling price pressures have reduced rate hike expectations, providing support for gold prices.

The most critical fundamentals this week are the US PPI inflation indicators on the 18th. Together with last week’s CPI data, the PPI indicators will provide a more complete picture of the direction of US inflation and are likely to affect gold prices. As interest in the Fed’s future policy direction mounts, markets will also be especially sensitive to FOMC members’ speeches this week.

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Written by:
Myrsini Giannouli

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