Gold Showing Textbook Reaction to Hawkish Fed

Gold futures are trading lower on Thursday as traders continue to react to yesterday’s hawkish comments from U.S. Federal Reserve Chairman Jerome Powell, who signaled an interest rate increase in March.

Although the news was no major surprise, it still drove Treasury yields higher, which increased the opportunity cost for gold. Higher yields made the U.S. Dollar a more attractive asset while making the dollar-denominated asset more expensive for foreign buyers.

At 13:17 GMT, April Comex gold futures are trading $1810.10, down $21.90 or -1.20%. On Wednesday, the SPDR Gold Shares ETF (GLD) settled at $169.76, down $2.82 or -1.63%.

Essentially, traders are posting the textbook reaction to the threat of higher interest rates. “The reaction was normal in the sense that Chairman Powell stressed the strength of the economy and the determination to fight inflation,” said Commerzbank commodities analyst Carsten Fritsch.

Fed Likely to Hike Rates in March as Powell Vows Sustained Inflation Fight

The Federal Reserve on Wednesday said it is likely to hike interest rates in March and reaffirmed plans to end its bond purchases that month in what U.S. central bank chief Jerome Powell pledged will be a sustained battle to tame inflation.

“The committee is of a mind to raise the federal funds rate at the March meeting assuming that the conditions are appropriate for doing so,” Powell said in a news conference, pinning down a policy statement from the central bank’s Federal Open Market Committee that only said rates would rise “soon”.

Subsequent interest rate increases and an eventual reduction in the Fed’s asset holdings would follow as needed, Powell said, while officials monitor how quickly inflation falls from current multi-decade highs back to the central bank’s 2% target.

Short-Term Outlook

While Powell’s comments may be seen as a short-term rally killer, we’re going to withhold judgement as to whether it will turn long-term bearish until we see how it reacts to the $1782.50 – $1758.80 retracement zone. But more importantly the September 29 bottom at $1725.00.

All Powell really said, in our opinion, is that the Fed will take the first step toward taming inflation. His own words suggested policymakers would have to continue to monitor the results of this move and subsequent rate hikes. We expect gold to continue to react to inflation rates, which could mean lower prices or renewed buying.

Since the Fed’s last policy meeting in December, Powell said, inflation “has not gotten better. It has probably gotten a bit worse… To the extent that situation deteriorates further, our policy will have to reflect that.”

We’re looking for the weakness in gold to continue until prices hit a value area. If buyers come in to support the market at that time, gold will make another run at breaking out to the upside. The strength of the rally, however, will be determined by how effective the Fed’s first rate hike will be against inflation.

The key will be trying to determine how fast it takes the rate hike to trickle through the economy.