Gold Prices Extend Lower Amid Hawkish Fed, Geopolitical Tensions

[MongiIG]

GOLD PRICE OUTLOOK:

• Gold extended lower on Monday after falling 2.36% a week ago, trading at around $1,789
• Fed Chair Powell’s hawkish comments at the FOMC meeting rattled the gold market, weighing on prices
• Prices are eyeing $1,784 for immediate support, breaching which may open the door for further losses

Gold extended a four-day losing streak during Monday’s APAC mid-day trading session. Prices have fallen 2.36% last week after Fed Chair Jerome Powell painted a hawkish-biased outlook for rate hikes, saying that he will not rule out the possibility of raising rates at every forthcoming policy meeting to rein in inflation. This is more than a market expectation of 3-4 rate hikes this year, resulting in sharp market reactions. The US Dollar index jumped while gold prices tumbled, as a rising interest rate is suppressing the non-yielding precious metal.

US inflation has reached the highest level in four decades, with the core PCE price index hitting 4.9% in December. The core PCE is a key inflation gauge that the Federal Reserve looks at to decide policy rates, so a strong print may reinforced the case of Fed tightening. Although gold is perceived as a good hedge against inflation, the outlook of rate hikes seems to have overridden this character recently.

A stronger US DollarIndex (DXY) has also weighed on precious metal prices, as it makes them more expensive to investors holding a foreign currency. DXY and gold prices exhibit a historically negative relationship, and their past 12-month prices are shown on the chart below.

Gold Prices vs. DXY US Dollar Index – Past 12 Months

Source: Bloomberg, DailyFX

Meanwhile, heightened geopolitical tensions surrounding the Russia-Ukraine border have likely boosted demand for gold, which is a perceived safe haven. Ongoing disputes between the two actors may help to cushion the downside for gold against the headwind of Fed rightening.

Looking ahead, traders are eyeing this Friday’s US nonfarm payrolls report for clues about the condition of the labor market and their ramifications for the Fed policy outlook. Besides that, RBA and ECB interest rate decisions are also in focus.

Technically, gold prices fell for a fourth day to $1,789, entering into a period of consolidation. Prices are testing a trendline support at around 1,784, which is also the 61.8% Fibonacci retracement. Failing to hold above 1,784 may lead to a pullback towards 1750 for support. The MACD indicator formed a bearish crossover, suggesting that downward momentum isdominating.

Gold - Daily Chart

Chart created with TradingView

 

 

Written by Margaret Yang, Strategist for DailyFX.com. 31st Jan 2022