Gold prices fell on Wednesday on a stronger dollar, while data showing U.S. consumer prices rose faster than expected last month reinforced investors’ concerns that the Federal Reserve will continue to tighten monetary policy.
“Aggressive tightening likely to put pressure on gold”
Rising interest rates are discouraging investors from investing in non-yielding assets like gold. City Index senior market analyst Matt Simpson comments:
A more aggressive tightening path is more likely to put pressure on gold for the foreseeable future. However, with the bearish momentum slowing and gold closing flat on Tuesday despite strong inflation, perhaps the path of least resistance is slightly higher than current levels.
“This will put pressure on anxiety”
Fed officials said on Tuesday that the US central bank should continue to gradually increase interest rates to beat inflation. Dallas Fed President Lorie Logan said: “We must remain prepared to sustain rate hikes longer than previously anticipated. “Given the risks, we shouldn’t be locked into a top interest rate or a fixed rate path,” he said.
Following the CPI data, both Richmond Fed Chairman Thomas Barkin and Dallas Federal Reserve Chairman Lorie Logan said the central bank should focus on reducing inflation to its 2% target. While the Fed is expected to increase the policy rate at least two more times to the range of 5%-5.25%, financial markets remain likely to raise interest rates by a quarter point in the summer months.
David Meger, director of metals trading at High Ridge Futures, says the Fed may feel the need to be more aggressive in rate hikes and need to combat inflationary pressures. He notes that the continuation of this concern will put pressure on gold.
“Fed will not be overtly aggressive”
“The pace of inflation remains moderate, but at a slower rate,” said Jeff Klearman, portfolio manager for GraniteShares, who manages the GraniteShares Gold Trust BAR. Interestingly, core inflation increased less than overall inflation,” he explains.
Jeff Klearman says that gold is finding support and spending more time in trade, reacting to the slowing inflation rate, but also taking into account that Fed policy may not change appreciably by the CPI data. “Reflecting on investor sentiment, the Fed won’t be overtly aggressive, although it won’t change its policy significantly,” Klearman says.
“There may be a short-term upside for gold prices”
According to the Australia and New Zealand Banking Group (ANZ), gold’s upside momentum waned as market expectations shifted towards a more hawkish Federal Reserve in the second quarter. Short-term risk for gold shows below $1,800. ANZ strategists Daniel Hynes and Soni Kumari commented in a note Monday:
The recent repricing of market expectations around Fed tightening could create a short-term headwind for gold prices. A strong labor market could see more surprises in inflation and push the Fed into a more hawkish stance.
Hynes and Kumari expect gold to experience short-term volatility as market rate expectations deviate from the Fed’s outlook. Unemployment is historically low and inflation remains above the Fed’s target range. According to analysts, this could keep the Fed hawkish. The US dollar will continue to be the main driver of gold this year. At the beginning of the year, when the dollar weakened, gold rose. However, the US dollar strengthened after the strong jobs report in January, which suppressed gold. Still, this latest trend is likely temporary, according to analysts.
“This situation should support gold”
ANZ’s year-end price target for gold remains at $1,900. The bank forecasts further earnings for the precious metal in the second half of the year. Analysts explain their views on this issue as follows:
The mature phase of the marching cycle should not lead to rate hikes at the pace seen in 2022. This will keep DXY well below last year’s high. The ‘fear factors’ that drove the safe-haven flow to the USD last year have also subsided. This leads us to believe that a structural drop in the dollar is on the cards, which should support gold.
“There may be more corrections for gold in the short term”
cryptocoin.comAs you watch on , gold fell sharply after hitting $1,960 and hitting nine-month highs on hopes the Fed will ease its tightening cycle. According to analysts, an ounce of gold could drop below $1,800 technically in the short term. Hynes and Kumari point out that further selling could cause prices to drop below $1,800 in the short term. In this regard, they record:
Although this correction seems normal after a 20% price rally, the uptrend seems to be decreasing. The recent correction broke the trendline support of the ascending wedge formation. Strategists say further declines in gold prices could trigger more technical selling in the short term. Key supports are $1,800 and $1,730. On the upside, close resistance is located at the $1,900 level. If the price climbs above $1,930, it confirms that the uptrend will continue.
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