- The dollar firmed as markets awaited the Fed monetary policy meeting.
- Initially, gold had rallied to record highs after Powell’s dovish testimony.
- Gold reversed sharply when the US released its consumer and producer price reports.
Gold prices dropped on Tuesday amid a stronger dollar as markets awaited the Fed monetary policy meeting. A stronger dollar makes gold expensive for foreign buyers, hurting demand. The dollar strengthened amid speculation that the Fed would revert to its hawkish tone after inflation beat forecasts.
Initially, gold had rallied to record highs after Powell confirmed that the Fed would cut rates by the end of the year. He was more dovish than he had been since the year began. This pushed up bets for the first cut in June.
Spot gold (Source: Bloomberg)
However, gold reversed when the US released its consumer and producer price reports. However, it held near record highs. It became evident that inflation remains hot in the US and that the Fed might hesitate to cut rates. Consequently, rate-cut bets fell, and Treasury yields surged, weighing on the non-yielding yellow metal.
The likelihood of a Fed cut in June fell from 71% to 59%. At the same time, traders now expect fewer cuts in 2024. This means that the Fed will keep higher interest rates for longer. Ideally, gold prices would rise with inflation, as it is a hedge against inflation. However, the opportunity cost of holding gold goes up with interest rates. As a result, investors prefer to buy yielding assets.
At the meeting on Wednesday, the Fed will likely hold on to the current high rates. However, the economic projections and Powell’s press conference will move markets. If the Fed expects the economy to continue performing well, then there will be no hurry to cut rates until inflation shows a clear downtrend. On the other hand, if the forecasts show a weaker economy, there will be pressure to cut rates and avoid a recession.
Meanwhile, the press conference might contain clues on the outlook for rate cuts. Some experts believe Powell might maintain his dovish stance to avoid panic and volatility in the market. However, there is also a chance that he will change his tone to reflect the hot inflation figures. A hawkish Powell would further weigh on gold prices. Still, despite the drop in rate cut bets, analysts are confident US interest rates will start dropping this year. Gold will likely recover when economic data starts reflecting this outlook.
