Gold prices took a significant tumble on Tuesday, sliding toward the $1900 mark, as high US bond yields bolstered the strength of the US Dollar (USD). Traders are bracing themselves for the Federal Reserve’s commitment to keeping interest rates “higher for longer.” As a result, XAU/USD witnessed a decline of 0.76% after reaching a daily high of $1916.89, now trading at $1901.16.
Gold Prices Under Pressure
Gold prices are facing substantial downward pressure as market participants anticipate an extended period of high-interest rates. XAU/USD’s decline to $1901.16 reflects a 0.76% drop, driven by these expectations.
Bond Yields and the Dollar Surge
One of the primary drivers behind the weakness in gold is the surge in US bond yields. Specifically, the US 10-year Treasury Inflation-Protected Securities (TIPS) yield, which serves as a proxy for real yields, reached a fourteen-year high at 2.236%. This level was last witnessed in July 2009. Simultaneously, the US Dollar Index, tracking the USD against six major currencies, reached 106.17, marking a 0.21% increase after hitting a new year-to-date high of 106.20.
Fed’s Surprise Decision and Inflation Concerns
The Federal Reserve’s decision last week to keep rates unchanged but revise upward the interest rate outlook for 2024 from 4.6% to 5.1% caught many traders off guard. Expecting potential rate cuts by the Fed in the coming year, market participants are now adjusting their strategies to account for the likelihood of higher rates. This shift is evident in the reaction of financial markets.
Furthermore, despite the Fed emphasizing the need for patience, a majority of officials appear prepared to raise rates again. Inflation concerns are a significant driver in this stance, with the Consumer Price Index (CPI) indicating a recent increase to 3.7%. The recent rally in oil prices, with West Texas Intermediate (WTI) nearing the $90.00 per barrel mark, is adding to these inflationary pressures.
Economic Data and Outlook
In terms of economic data, the Conference Board reported that consumer confidence reached a four-month low, with the index dropping to 103 from August’s 108.7 and falling below estimates of 105.5. This decline is attributed to a worsening economic outlook.
Housing data revealed that while August’s Building Permits in the US showed growth, New Home Sales plummeted by -8.7%, indicating weakness in the housing market. This decline is primarily due to higher mortgage rates, as the Federal Reserve embarked on an aggressive tightening cycle, pushing interest rates into the 5.25%-5.505 range.
Upcoming Economic Data
Looking ahead, the US economic calendar will feature key releases, including Durable Goods Orders, Initial Jobless Claims, GDP figures, the Fed’s inflation gauge, and the core PCE index. Additionally, market participants will closely watch for insights from Federal Reserve speakers.
Technical Outlook
On the technical front, the daily chart for XAU/USD suggests that the yellow metal may extend its losses, potentially breaking below the $1900 level. Such a move could pave the way for testing the August 21 cycle low at $1884.89 and, subsequently, the March 8 daily low of $1809.48. However, if XAU/USD manages to stay above $1900, it could open the door to reclaiming September’s high at $1947.39.
In conclusion, gold prices are grappling with the impact of rising US bond yields and the prospect of prolonged high-interest rates as signaled by the Federal Reserve. Traders are navigating these challenges while closely monitoring economic data releases and the Fed’s stance on monetary policy.