The price of gold is currently showing signs of potentially surpassing the resistance level of $1,940.00 in the Tokyo trading session. The demand for gold has been increasing as investors seek safe-haven assets, as reflected by the declining yields on US government bonds. The 10-year US Treasury bond yield has dropped to a low of 3.45%.
However, there is a chance that the gold price may decrease if the US dollar strengthens. The dollar has been approaching a key resistance level in the daily trendline. If this level is breached, it could signal a potential decrease in the gold price.
Additionally, there is a possibility that the bullish trendline for gold may be vulnerable in the days ahead. If resistance levels hold, a sell-off and capitulation of gold bulls could lead to a significant drop in the gold price towards $1,900.
Resource: FXStreet
Experts Weigh in on the Current State of the Gold Market
The price of gold has been showing strong progress on Wall Street, experiencing a rally from a low of $1,917.22 to a high of $1,942 thus far. The increase in gold price marks the highest level in nine months, as investors seek safe haven assets in light of a decrease in the US dollar and bond yields. This trend was further solidified by the 1% drop in leading economic indicators in December, which has led to expectations of another interest rate hike by the Federal Reserve at their upcoming policy meeting.
The weakening of the US dollar has made gold more accessible for international buyers, and with Fed officials on a blackout week before the highly-anticipated interest rate decision, the gold price is thriving. Investors are now closely monitoring the upcoming release of US economic data, which could have a significant impact on the Federal Reserve’s future policy decisions.
Federal Reserve’s Upcoming Interest Rate Decision Sparks Debate Amongst Investors
Investors are closely monitoring the Federal Reserve’s upcoming policy meeting on January 31st and February 1st, as they anticipate a potential interest rate hike of 25 basis points. This follows a slower pace of 50 basis points in December, after four consecutive 75-bp hikes. The decision on interest rates is of particular significance to the gold market, as lower interest rates decrease the opportunity cost of holding non-yielding assets such as gold.
One of the more hawkish voices on the subject of interest rates is St. Louis Federal Reserve President James Bullard. He has stated that US interest rates have to rise further in order to ensure that inflationary pressures recede. “We’re almost into a zone that we could call restrictive – we’re not quite there yet,” Bullard said in a recent Wall Street Journal interview. He emphasized that officials want to ensure inflation will come down on a steady path to the 2% target, and “We don’t want to waver on that.”
Bullard has even gone so far as to predict a rate range of 5.25% to 5.5% by the end of this year. He believes that policy has to stay on the tighter side during 2023 as the disinflationary process unfolds.
However, recent economic reports such as the Producer Price Index and Retail Sales have shown disinflationary tendencies, reinforcing expectations that the Fed will continue to reduce its tightening pace in upcoming meetings. Analysts at ANZ Bank recently wrote a note entitled, “Fed tightening not done yet” and explained that “So far in early 2023, US data releases have indicated a mild easing in inflationary pressures and softer demand. This indicates the Fed’s aggressive tightening last year is starting to take effect. Weakness in housing is evident (existing home sales fell 17.8% last year), manufacturing activity has faltered and Retail Sales are returning to trend.”
Analysts at Brown Brothers Harriman also believe that the market is underestimating the potential for a higher longer Federal Reserve. They stated that “Core Personal Consumption Expenditures, PCE, has largely been in a 4.5-5.5% range since November 2021. We think the Fed needs to see further improvement before even contemplating any sort of pivot.”
With the Fed’s policy meeting fast approaching, investors are closely monitoring the release of economic data that could impact the Fed’s policy path. The decision on interest rates will have a significant impact on the gold market, as well as the broader economy. It remains to be seen whether the Fed will opt for a more hawkish or dovish stance, but one thing is for certain, the outcome will be closely watched by investors and analysts alike.
Euro’s Recent Improvement Puts Pressure on USD and Supports Risk Appetite for Gold
The Euro has been showing signs of improvement lately, which has had a negative impact on the value of the US dollar and has helped to boost the price of gold. Despite this, policymakers from the European Central Bank (ECB) have stated that the recent decline in inflation is not a reason to slow down the pace of interest rate increases.
On Monday, ECB member Peter Kazimir stated that although the decrease in inflation is good news, it should not be used as an excuse to hold back on raising interest rates. Similarly, governing council member and Governor of Austria’s central bank, Olli Rehn, and ECB governing council member Klaas Knot have both advocated for steep rate hikes in the near future. Knot specifically mentioned that he expects rates to be raised by 0.5% in February and March and that more increases will follow in May and June.
Some analysts at TD Securities have noted that the price of gold may struggle to increase further if the ECB stops being the largest buyer of gold in recent months. They also pointed out that a break below the $1,900/oz range could lead to trend-follower liquidations.
Conclusion
In conclusion, the gold market is currently experiencing a rally as investors seek safe haven assets in light of declining yields on US government bonds and a weakening US dollar. The 10-year US Treasury bond yield has dropped to a low of 3.45%, and the dollar has been approaching a key resistance level in the daily trendline. The Federal Reserve’s upcoming interest rate decision on January 31st and February 1st is also being closely watched by investors, as a potential interest rate hike of 25 basis points could impact the gold market. However, recent economic reports such as the Producer Price Index and Retail Sales have shown disinflationary tendencies, which could lead the Fed to continue reducing its tightening pace in upcoming meetings.
Investors should closely monitor the market developments and economic data releases in the days ahead as they could have a significant impact on the gold price.
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