Gold prices in turmoil after Fed

Gold prices were volatile on Wednesday, climbing to $1,945 per ounce in early trading but paring gains after the Fed rate decision and dropping to $1,935 per ounce. If gold prices increase, resistance may be encountered near $1,950 per ounce, while if gold prices decline, support may be found near $1,900 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 gained strength on Wednesday after the Fed interest rate announcement and the dollar index climbed to the 105.3 level. US Treasury yields also strengthened on increased rate hike expectations, with the US 10-year bond yielding above 4.35%.   

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. FOMC members unanimously voted on Wednesday to keep interest rates unchanged at a target range of 5.25% to 5.50%. 

The Fed decided to pause rate hikes but that does not necessarily mean it has reached its rate ceiling. The Fed policy statement following the meeting left the door open for further rate hikes. Market odds of another rate hike within the year are increasing, although it is clear that the Fed’s future policy direction will be data-driven.

Inflationary pressures in the US are not easing just yet, despite the Fed’s high-interest rates. Headline inflation came in hotter than anticipated, climbing to 3.7% year-on-year in August from 3.2% in July versus 3.6% anticipated. Rising fuel costs are largely to blame for the stubbornly high inflation rates in the US. Increasing price pressures may push the Fed to continue its hawkish policy until inflation drops closer to the Fed’s 2% target.

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Written by:
Myrsini Giannouli

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