Gold Flat as Rate Hike Expectations Offset Weaker Dollar and Yields

Gold-Bar

Gold prices were steady on Monday despite the weakness of the U.S. dollar and Treasury yields. The greenback fell 0.1% against rival currencies while the 10-year benchmark yields slipped to near eight-week troughs. But the anticipated aggressive rate hike by the Federal Reserve countered their impact. The market is expecting a 75-basis-point interest rate this week.

Spot gold is currently trading at $1,725.71 per ounce as of 0715 GMT.

Gold benefits from higher inflation but is vulnerable to higher interest rates. Prices have fallen by 16% or $350 per ounce since early March because of the Fed’s rapid rate hikes. The two-day policy meeting of the Federal Open Market Committee will conclude on Wednesday.

U.S. Treasury Secretary Janet Yellen said the Fed’s rate hikes were helping to bring soaring prices back in check. The inflation is “way too high,” pushing the economy to the brink of a recession. However, she argued that recession is not inevitable. Yellen cited the fourth consecutive month of job gains and the administration’s efforts to lower gas prices.

On Thursday, the European Central Bank (ECB) joined its global peers and raised interest rates by 50bps, adding more pressure on gold prices. It was the ECB’s first rate hike in 11 years. The central bank would likely implement another half-point increase in September to bring inflation back to its 2% target. Last month, inflation in the European Union hit a record 8.6%.

FXStreet senior analyst Dhwani Mehta predicted that gold would resume recovery towards $1,750 per ounce. The bullion entered an upside consolidation phase after testing the 100-SMA at $1,738, she said. Gold prices also reached a new weekly high on Friday. Mehta also mentioned that the Relative Strength Index is just above the midline, indicating more room for recovery.

In physical trading, gold demand picked up in India after local prices dropped to their lowest level since May 16. Jewelers resumed their purchases for the International Jewelry Show in August. But some buyers are still waiting for a further price correction. In China, local jewelry stores reported a significant increase in demand. Dealers sold physical at the $3.5-$9 over global prices.