- Bets for more aggressive Fed rate hikes, stronger USD prompted some selling around gold.
- The worsening global economic outlook, rising inflationary pressure could lend some support.
- Traders now look forward to Fedspeak for a fresh impetus and some short-term opportunities.
Gold extended the previous day’s retracement slide from the vicinity of the $2,000 psychological mark and witnessed some selling on Tuesday. The intraday downfall picked up pace during the early North American session and dragged spot prices to a four-day low, around the $1,957 region in the last hour. The US dollar stood tall near its highest level since April 2020 and continued drawing support from expectations for a more aggressive policy tightening by the Fed. In fact, the markets have been pricing in multiple 50 bps rate hikes by the Fed. This, along with concerns that the worsening Ukraine crisis would put upward pressure on already high inflation, remained supportive of elevated US Treasury bond yields. The combination of factors overshadowed worries about the economic fallout from a protracted Russia-Ukraine war and weighed on the precious metal.
Meanwhile, the COVID-19 lockdowns in China, a protracted Russia-Ukraine war, along with a potential European Union (EU) embargo on Russian gas have intensified inflation and growth concerns. The market fears were further fueled by the fact that the International Monetary Fund (IMF) lowered its growth forecast for the global economy. In its latest World Economic Outlook, the IMF now projects global growth at 3.6% in 2022 and 2023, down from the January projection of 4.4% and 3.8%, respectively. The IMF also warned war-related supply shortages will amplify existing inflationary pressures, which, in turn, could benefit the safe-haven gold’s appeal as a hedge against rising costs. That said, the sentiment will be driven by the Fed rate hike expectations.
All eyes on the Fed and US dollar
More hawkish comments from Federal Reserve officials have reinforced expectations for faster US policy tightening. They started to flow in from New York Fed President John Williams who said last week that a half-point rate rise next month was “a very reasonable option,” in a further sign that even more cautious policymakers are on board with faster monetary tightening.
Meanwhile, Fed member James Bullard spoke on Monday and offered further insight on the outlook for Fed policy. Bullard is one of the bank’s most hawkish and has called for interest rates to reach 3.0% this year.
US inflation is “far too high,” he said on Monday, repeating his case for increasing interest rates to 3.5% by the end of the year to rein in inflation expectations and slow what are now 40-year-high inflation readings.
“What we need to do right now is get expeditiously to neutral and then go from there,” Bullard said at a virtual event held by the Council on Foreign Relations, adding that he doesn’t expect to need to raise rates by more than half a percentage point at any meeting.
He said that the Unemployment Rate can continue to fall even with aggressive rate hikes, repeating his view that unemployment, now at 3.6%, will go below 3% this year.
This all comes ahead of the Fed Chair Jerome Powell later this week, where he is expected to solidify expectations for a 50 bps rate hike at the coming Fed policy meeting.
As a consequence of such sentiment, the US rate futures market has priced in a 96% chance of a 50 basis-point tightening at next month’s Fed policy meeting, and about 215 basis points in cumulative rate increases in 2022, providing ample support for the dollar.
As for positioning, speculators’ net long bets on the US dollar fell for a second straight week, according to calculations by Reuters and US Commodity Futures Trading Commission data released on Friday. The value of the net long dollar position was $13.22 billion for the week ended April 12.
Gold technical analysis
The price had moved in on a firm area of hourly support:
The price was expected to reset the prior lows as resistance and then mitigate the remainder of the price imbalance below targeting the $1,970s.
The price is making progress:
The price was rejected near the old lows and has since crumbled, drifting lower and now meeting a freshly established resistance made up of a confluence of the dynamic trendline and horizontal highs.