Gold rally halted as panic wears off

Gold prices settled close to $1,980 per ounce on Monday, after hitting a one-year high of $2,000 per ounce earlier in the day. Gold prices soared last week, after the crisis in the banking sector raised recession concerns, driving investors towards safe-haven assets. This week, improved risk sentiment halted gold prices’ rally. If gold prices increase, resistance may be encountered near $2,070 per ounce, while if gold prices decline, support may be found near $1,885 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 Monday on reduced Fed rate hike expectations later in the week and the dollar index sank to 103.3. US Treasury yields remained mostly stable on Monday, with the US 10-year bond yielding approximately 3.5%. 

US inflation data last week showed that price pressures are decelerating, but at a slower pace than anticipated. Even though price pressures remain high, the Fed may be pondering a pivot in its monetary policy. 

The Federal Reserve raised interest rates by only 25 basis points at its February meeting, bringing the benchmark interest rate to a target range of 4.50% to 4.75%. 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. 

The Federal Reserve is holding its highly anticipated monetary policy meeting this week on the 22nd. The Fed is meeting against an increasingly uncertain economic backdrop this week, as the global banking crisis has changed market expectations.

Market rate hike bets have been completely repriced within the past couple of weeks. Markets were pricing in a 50-basis point rate hike for this week’s meeting, but now the odds are that the Fed will downshift to a 25-bp hike. Some analysts even maintain that the Fed might pause rate hikes completely this week as concerns about a banking sector meltdown remain high. Reduced rate hike expectations provide support for gold prices.

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Written by:
Myrsini Giannouli

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