On Monday, gold prices fell as U.S. Treasury yields rose to multi-year highs ahead of the Federal Reserve’s May meeting. The market expects the central bank to announce aggressive rate hikes. Higher bond yields and interest rates raise the opportunity cost of owning the non-interest-bearing bullion.
Spot gold is currently trading at $1,885.13 per ounce as of 0750 GMT.
The Federal Open Market Committee (FOMC) will meet on May 3 and announce its decision the next day. Analysts expect aggressive rate hikes until summer to control rising inflation and labor costs. However, two reports indicate that both may have peaked in March.
The Commerce Department reported that the core personal consumption expenditures price index slowed slightly in March. There was also evidence of a shift towards spending on services rather than goods, which would ease upward price pressure. A separate report showed that the private wage growth leveled off at 5%.
But economist Andrew Hunter said those reports would not stop the central bank from raising interest rates by 50-basis-point this month.
Stephen Innes, the managing partner at SPI Asset Management, noted that the market is already pricing in a 50-basis-point hike. And it could jump to 57-bp in July. He said the Fed lags behind the market and might try to keep up with hawkish announcements.
DailyFX senior analyst Ross J. Bullard said gold is testing a critical support level near $1,880. The talk about the possibility of a 75-bps rate hike this week pushed the dollar to 20-year peaks and weighed on bullion prices.
Gold prices rose 1% on Friday after the U.S. dollar retreated and led some traders to expect another rally. But TD Securities analysts argued that the prospect of aggressive monetary tightening implies that any rally would have a limited life span. They suggested that long liquidations could be the reality until the second half of the year.
In physical trading, gold demand in India improved ahead of the Akshaya Festival. It prompted local dealers to reduce discounts by $2. But a local trader said demand has not fully recovered and will likely remain soft in the second quarter due to volatile prices. In China, the situation has not improved due to COVID-related lockdowns.