Gold steadies as the dollar slides

Gold prices have been declining for the past few days as the US dollar and yields surged. Gold’s slide was arrested on Tuesday, even though the dollar and US bond yields continued gaining strength. Gold prices traded continued trading sideways on Wednesday, oscillating around the $1,823 per ounce level. If gold prices increase, resistance may be encountered near $1,930 per ounce, while if gold prices decline, further support may be found near $1,800 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 dipped on Wednesday, with the dollar index dropping from a yearly high of 107.3 to 106.8. US bond yields remained firm, with the US 10-year bond yield at a 16-year high of 4.74%. Rising US yields and increased rate hike expectations have been bolstering the dollar in the past few days. The dollar, however, has been in overbought territory and its rally was paused on Wednesday.         

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 voted last week to keep interest rates unchanged at a target range of 5.25% to 5.50%. 

The Federal Reserve decided to pause rate hikes at its latest meeting, but that does not necessarily mean it has reached its rate ceiling. The Fed is likely to keep interest rates at high levels for longer to bring inflation down. At the same time, other major central banks are maintaining high-interest rates. Gold prices are tumbling since gold presents a less attractive option than interest-yielding treasury bonds.

Core PCE Price Index, the Fed’s preferred inflation gauge, indicated last week that price pressures in the US are cooling. The core PCE Price Index dropped to 3.9% year-on-year from 4.3% in July, increasing the odds of a pause in rate hikes in November. Headline inflation came in hotter than anticipated though, climbing to 3.7% year-on-year in August from 3.2% in July versus 3.6% anticipated. Inflationary pressures in the US remain high, despite the Fed’s high interest rates.

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Written by:
Myrsini Giannouli

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