Gold prices hinge on Fed meeting outcome

Gold prices gained strength on Tuesday ahead of the much-anticipated Fed meeting on Wednesday. Gold climbed above $1,655 per ounce in early trading, then pared some of the day’s gains as the dollar gained strength, dropping to $1,643 per ounce. If gold prices decline, support may be found near $1,616 per ounce and further down at the 2020 low near $1,441 per ounce. Resistance may be found around 1,674 per ounce and higher up at $1,729 per ounce.

The dollar withdrew in early trading on Tuesday but rallied later in the day with the dollar index dropping to 110.8 and then climbing back above 111.5. US Treasury yields also slipped in early trading but recovered later in the day, with the US 10-year bond yield rising from 3.94% to 4.06%.

A Fed black-out period started over a week ago, preventing further comments until the central bank’s next policy meeting on Wednesday. The dollar became more vulnerable without the fortifying effect of hawkish Fed speeches and lost ground on renewed risk appetite early on Tuesday. As the much-anticipated Fed meeting is drawing near, however, market confidence in the dollar increases on rate hike expectations. High-risk aversion sentiment has been prevalent throughout the year and is increasing the safe-haven dollar’s appeal. At the same time, the Fed’s increase in interest rates is attracting investors who seek higher returns, boosting the dollar. 

Gold prices are under pressure by the shift of most major Central Banks towards a tighter monetary policy to combat rising inflation rates. Assets yielding interest become a more appealing investment compared to gold as interest rates rise. Rampant US inflation has raised expectations of another steep rate hike at the Fed’s next policy this week, putting pressure on gold prices. 

The next Fed monetary policy meeting is on Wednesday and its outcome is expected to affect gold prices considerably. The US Central Bank has increased interest rates by 300 basis points this year, bringing its benchmark interest rate to 3.25%. Another rate hike of at least 75 bps is expected at Wednesday’s meeting and has already been largely priced in by markets.

Of equal importance to the interest rate announcement are the FOMC Statement and Press Conference following the monetary policy meeting. Market participants will focus on these in an attempt to gauge the central bank’s future policy direction. Fed policymakers may signal a return to a less hawkish direction in the future, in which case the US dollar and treasury yields may suffer a correction, which could send gold prices soaring. Market expectations are currently in favor of a 50-bps rate hike in December and a 25-bps hike in January. Rate hikes are expected to taper off in 2023 as the central bank moves into a stable interest rate.

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Written by:
Myrsini Giannouli

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