- Gold prices plunge as the US dollar and bond yields recover.
- The Fed remains firm on its outlook for three rate cuts this year.
- The improving US economic outlook has allowed the US dollar to heal its wounds.
Gold prices (XAU/USD) fell from new all-time highs near $2,220 early Thursday US time, amid a strong rebound in the US dollar and US Treasury yields. The US Dollar Index (DXY), which tracks the value of the US dollar against six major currencies, rebounded to 103.50 after the decline seen after the release of the Federal Reserve’s dot plot. Upward revisions to 2024 gross domestic product (GDP) and annual core personal consumption expenditure price index (PCE) forecasts appear to have limited the dollar’s downside. The improving US economic outlook bodes well for the US dollar. The yield on the 10-year U.S. Treasury bounced back to 4.27% as the Fed declined to say exactly when it would cut interest rates.
Earlier, speculation increased over expectations for the Fed’s June rate cut after a quarterly updated dot plot from its March policy meeting showed there were three remaining rate cut forecasts for this year. , gold prices hit a new all-time high. Comments from Federal Reserve Chairman Jerome Powell also supported the resilience of gold demand. Powell said despite the sticky inflation numbers in February, policymakers remain confident that underlying inflation is easing. The firm expectation that the Fed will lower interest rates reduces the opportunity cost of holding investments in non-yielding assets such as gold.
A daily digest that moves the markets: Gold prices fall as US yields rebound sharply
- Gold prices hit a record high of around $2,223 before falling sharply as the U.S. dollar rebounded from a five-day low of 103.17.
- Demand for gold is generally bullish after the US Federal Reserve indicated that inflation is moving in the right direction. Despite inflation remaining robust in the first two months of the year, the Fed remains confident that underlying price pressures are easing. Fed officials expect the annual core PCE price index to be 2.6% in 2024, higher than the 2.4% expected at its December policy meeting.
- The latest Fed dotplot showed that its December forecast of three rate cuts in 2024 remains on track. Nine out of 19 policymakers support three rate cuts this year, with one expecting more than three rate cuts. The remaining policymakers expected two or fewer rate cuts over the same period.
- This raised expectations that the Fed would cut interest rates at its June policy meeting. According to the CME FedWatch tool, the probability that a rate cut will be announced in June is just over 74%, up sharply from the 59% recorded before the Fed meeting.
- Although expectations remain that the Fed will cut rates three times this year, the median rate forecasts for 2025 and 2026 rose to 2.9% and 3.1%, respectively. The median forecast for long-term interest rates also rose to 2.6%.
- Regarding the U.S. economic outlook, the Fed expects the unemployment rate to be 4.0% by 2024, down from the 4.1% forecast in December. Meanwhile, the gross domestic product (GDP) forecast for 2024 has been revised upward to 2.1% from the December forecast of 1.4%.
Technical analysis: Gold price falls from highs near $2,220
Gold prices have fallen below $2,180 from a record high of around $2,220. Near-term demand for gold prices is very bullish as the 20-day exponential moving average (EMA) of $2,137 is rising vertically.
Gold prices are trading in uncharted territory but could face resistance near the 161.8% Fibonacci extension level at $2,250. The Fibonacci tool plots from a December 4 high of $2,144.48 to a December 13 low of $1,973.13. On the downside, the December 4 high of $2,144.48 will provide significant support for gold price bulls.
The 14-period Relative Strength Index (RSI) has been in a bullish range of 60.00 to 80.00, indicating further upside is expected.
Fed Frequently Asked Questions
Monetary policy in the United States is shaped by the Federal Reserve Board (Fed). The Fed has two responsibilities: achieving price stability and promoting full employment. The main tool to achieve these goals is to adjust interest rates. If prices rise too fast and inflation exceeds the Fed’s 2% target, interest rates will be raised, raising borrowing costs for the entire economy. This makes the US a more attractive place for international investors to put their money, and the US dollar (USD) appreciates. If inflation falls below 2% or unemployment is too high, the Fed could lower interest rates to encourage borrowing, which would weigh on the dollar.
The Federal Reserve (Fed) holds eight annual policy meetings where the Federal Open Market Committee (FOMC) assesses economic conditions and decides on monetary policy. Twelve Federal Reserve officials will attend the FOMC meeting. These include seven members of the Board of Directors, the president of the New York Fed, and four of the remaining 11 regional reserve bank presidents, all of whom serve one-year terms on a rotating basis. .
In extreme circumstances, the Federal Reserve may resort to a policy called quantitative easing (QE). QE is a process by which the Fed significantly increases the flow of credit in a stalled financial system. This is a non-standard policy tool used in times of crisis or when inflation is extremely low. This was the Fed’s weapon of choice during the Great Financial Crisis of 2008. This involves the Fed printing more dollars and using them to buy high-quality bonds from financial institutions. QE typically weakens the US dollar.
Quantitative tightening (QT) is the reverse process of quantitative easing, in which the Federal Reserve stops buying bonds from financial institutions and reinvests the principal of maturing bonds to buy new bonds. Never. It is usually positive for the value of the US dollar.
