Gold price outlook with Fed’s interest rate hike on the horizon

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on Mar 3, 2022
Updated: Jun 20, 2024
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Gold price is trading within a rather tight range of between $1,935 and $1,925 for the second session in a row following Jerome Powell’s testimony. At the time of writing, the precious metal was trading at $1,932.14.

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In his testimony before the US Congress on Wednesday, the Federal Reserve’s Chair – Jerome Powell – indicated that the US central bank will continue with its plan to gradually hike interest rates. On the one hand, he acknowledged that the Russia-Ukraine war have intensified economic uncertainties. Nonetheless, he was quick to add that the situation has not shifted the Fed from its path in dealing with the high inflationary pressures.

With regards to the situation in eastern Europe and subsequent reaction of the global economy, Powell stated that the Fed is “going to avoid uncertainty to what is already an extraordinarily challenging and uncertain moment.”

Amid the strengthening labour market, rapidly recovering economy, and soaring prices, the Fed Chair is of the opinion that a quarter-point interest rate hike is an apt point to begin its plan of increasing rates and dealing with high inflation. At the beginning, the US central bank is set to gradually hike interest rates. However, it is ready to embrace a more aggressive approach if inflation does not cool down within a reasonable timeframe.

The first interest rate hike since December 2018 is expected about two weeks from now after the Fed meeting that will be concluded on 16th March. With that in mind, gold price will likely record curbed gains in the short term. The precious metal is usually sensitive to higher interest rates as it increases the opportunity cost of holding the non-yielding bullion.

In fact, following Jerome Powell’s testimony on Wednesday, Treasury yields rallied back above 1.90% to an intraday high of 1.91%. Granted, it has since pulled back to 1.88% as at 08:34 a.m GMT. As the US bond yields continue to find support at 1.85%, gold price is trading within a rather tight range of between $1,935.70 and $1,925.00 for the second session in a row.

Nonetheless, the precious metal is still finding support in the ongoing Russia-Ukraine war and the subsequent demand for safe havens. Explosions have been reported in Ukraine’s capital city, Kyiv while the nation’s second city, Kharkiv remains under severe attack from Russian troops. Besides, Moscow has taken over the southern Ukraine city of Kherson and surrounded Mariupol.

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