Gold unfazed by Fed rate decision

Gold prices edged lower after the Fed rate decision on Wednesday dropping to $1,975 per ounce. Market reception of the Fed’s rate announcement, however, was more subdued than usual and gold prices exhibited low volatility on Wednesday. If gold prices increase, resistance may be encountered near $2,010 per ounce, while if gold prices decline, support may be found near $1,950 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 exhibited relatively low volatility after Wednesday’s Fed rate decision, with the dollar index remaining firm near the 106.7 level. US bond yields, on the other hand, retreated sharply, with the US 10-year bond yielding approximately 4.76%. 

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. On Wednesday, FOMC members voted to keep interest rates unchanged at a 22-year high within a target range of 5.25% to 5.50%. A pause in rate hikes was widely anticipated, however, and had already been priced in by markets, and the effect on gold prices was muted. 

Fed Chair Jerome Powell’s speech after the conclusion of the meeting had hawkish undertones, however, boosting the dollar and putting pressure on gold prices. Powell stated that the Fed is still not confident that the current interest rates will be restrictive enough to achieve the central bank’s 2% inflation goal and warned that another rate hike in December is not out of the table. The Fed’s approach remains largely data-driven and will depend on how fast inflationary pressures may ease in the next months. Market expectations that US interest rates have peaked are raising the comparative appeal of gold against the dollar as a haven asset.

The crisis in Israel has given rise to a risk aversion sentiment, boosting demand for gold. Fears of the Israeli war spreading to the Middle East are increasing the appeal of haven assets such as gold. Gold prices increase in times of war as more traders shy away from riskier assets and invest in assets that are more likely to preserve their value. 

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Written by:
Myrsini Giannouli

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