Following its collapse from the all-time high of $2,070 on Mar. 8, gold continues to consolidate in the $1,920-1,930 area. Treasury bond yields keep rising amid the Fed's hawkish rhetoric, pressuring gold prices. Market participants are still analyzing Powell's comments.
Speaking at the National Association for Business Economics annual conference on Monday, he noted the central bank was prepared to raise interest rates in half-percentage-point steps and keep the rates high enough to prevent the economy from overheating and bring down inflation.
It's worth mentioning that the Fed has not raised its key rate by half a percentage point since May 2000. Some regional Federal Reserve Bank presidents have previously called for such action. President and CEO of the Federal Reserve Bank of St. Louis, James Bullard, pushed for a half-point increase at the last Fed's meeting.
However, the Federal Open Market Committee (FOMC) voted to increase the fed funds rate by only 25 basis points at its March meeting.
"The Fed needs to move aggressively to keep inflation under control,"
Bullard said in an interview Tuesday on Bloomberg Television. Such rhetoric from the Fed has fueled a rally in 10-year Treasury notes which hit 2.4%, the highest level since May 2019. Following Powell and Bullard's comments, Goldman Sachs) economists noted they expected the US regulator to raise rates by half a percentage point at its May and June meetings.
Interest rate hike expectations in the US may increase pressure on gold prices. On the one hand, the prospects of a more aggressive monetary policy tightening will strengthen the US currency, making dollar-denominated commodities, including gold, more expensive for holders of other currencies.
On the other hand, the rate increase will support the US debt market rally, a negative factor for precious metals. With rising Treasury yields, the opportunity cost of holding gold also increases, given that it does not generate interest and coupon income.
Nevertheless, gold's downside potential will be limited by ongoing tensions in Eastern Europe. If the situation deteriorates, traders will start buying safe-haven gold again, counting on its protective properties.
Until this happens, however, the XAU/USD pair will maintain its potential for a downward correction to the $1,900-1,890 per ounce range, from which we recommend placing long positions with a target of $2050 and higher.