Gold prices edge higher on reduced rate hike expectations

Gold prices extended last week’s gains on Tuesday, benefitting from a softer dollar and US yields. Gold prices climbed above the $1,765 per ounce resistance, touching $1,785 per ounce. If gold prices decline, support may be found near $1,666 per ounce and further down at $1,616 per ounce. Resistance may be found at around $1,802 per ounce.

The collapse of the US dollar and yields caused gold prices to skyrocket last week. The USD continued to decline this week, buoying gold prices The dollar extended last week’s losses on Tuesday, as US PPI inflation data came out softer than expected. The USD continued to decline in early trading, with the dollar index briefly touching the 105.5 level. The dollar pared losses later in the day, climbing above 106.5. US Treasury yields declined, with the US 10-year bond yielding below 3.8%. Diminishing Fed rate hike expectations are putting pressure on US bond yields and dollar price, which had been trading in the overbought territory over the past few months.

US Monthly CPI in October rose by only 0.4% against predictions of 0.6%. Annual CPI printed at 7.7%, compared to 8.2% the previous month and the 7.9% expected. Slowing price pressures may induce the Fed to pivot towards a more dovish policy reducing the aggressiveness of future rate hikes.

On Tuesday, PPI data confirmed that US inflation is cooling faster than expected, causing the dollar to plummet. Monthly PPI for October printed at 0.2%, against expectations of 0.4%. Monthly Core PPI, which excludes food and energy, was stagnant, versus a 0.3% rise predicted and a 0.2% rise in September. 

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. The US Federal Reserve voted to increase interest rates by 75 basis points at its latest monetary policy meeting. 

Fed rhetoric is especially important this week as it may provide hints on the US central bank’s direction after recent soft inflation data. Fed rhetoric remained hawkish this week, although cautiously so. The consensus between FOMC members seems to be that although inflation is cooling, further tightening will be required to bring inflation down consistently to the central bank’s 2% target.

Market expectations of future rate hikes were considerably trimmed after last week’s inflation report and were further diminished after Tuesday’s inflation print. Market odds are currently between a 50-bps and a 25-bps interest rate increase in December. Rate hikes are expected to taper off in 2023 as the central bank moves into a stable interest rate. 

The US mid-term Congressional elections last week have also put pressure on the dollar, providing support for gold prices. Concerns that the Democratic party might lose control of Congress in the mid-term elections, leading to political instability in the US, pushed the dollar down, boosting gold prices. 

High volatility is expected for gold and dollar prices this week, as markets will await the US mid-term elections outcome. Concerns that the Democratic party might lose control of Congress in the elections, leading to political upheaval in the US, have pushed the dollar down. Over the weekend, the Democratic party announced their victory in the key State of Nevada, which would have secured control of the House for the ruling party.  It seems, however, that the Democrats were too quick to rejoice, as votes are still being tallied and the battle for securing the Senate seems to be close.

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Written by:
Myrsini Giannouli

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