Gold prices dip as U.S. dollar and Treasury yields rise

As the U.S. dollar gained strength and Treasury yields rose, gold prices recorded a slight decline on Tuesday. Spot gold dropped by 0.3 percent to $2,049.20 per ounce by 04:02 GMT. Meanwhile, U.S. gold futures saw a modest increase of 0.1 percent, reaching $2,052.90. 

Apart from watching dollar and yields data, market participants are further waiting for insights from several U.S. Federal Reserve (Fed) officials, who are scheduled to speak throughout the week. This anticipation revolves around gaining a better understanding of the Federal Reserve’s (Fed) potential rate-cut plans.

U.S. dollar and gold prices

According to Matt Simpson, a senior analyst at City Index, the strengthening dollar is a significant factor influencing gold prices. 

The dollar index touched a 10-day peak, reducing the appeal of gold for holders of other currencies. At the same time, yields on the U.S. 10-year Treasury notes climbed above 4 percent. This week will feature speeches from at least six Fed officials, including a significant talk by Fed Governor Christopher Waller at the Brookings Institution, which will focus on the economic outlook.

Simpson noted that the market has already priced in multiple rate cuts, and he wouldn’t be surprised if Waller’s remarks lean towards a more conservative stance, potentially leading to a rebound in spot gold prices to around $2,035.

Read: Indicators suggest gold will maintain strength in 2024

Rate cuts

The Federal Reserve’s meeting on January 30-31 is expected to result in maintaining the current policy rate. Despite this, there’s speculation about possible rate cuts. Traders are foreseeing up to six 25 basis point reductions this year, potentially starting in March.

Concurrently, the U.S. Congress is considering a substantial tax reduction, as noted by a CPT Markets report. This move could heighten inflation, influencing the Fed’s interest rate decisions. If inflation rises due to stimulated economic activity from lower taxes, the Fed may hold or increase rates rather than cut them. Such an increase in interest rates usually strengthens the U.S. dollar, contributing to the recent rise in Treasury yields and the decline in gold prices.

“The U.S. Congress is considering reducing about $70 billion in taxes for businesses and households. Economic experts worry that this proposal could increase price pressure. The tax reduction proposal will not be passed easily because Congress is deeply divided over the direction of fiscal policy. Some Republican lawmakers asked Washington to sharply reduce public spending to prevent a partial government shutdown on January 19 and February 2. If approved, tax reduction programs will become a double-edged sword for the U.S. economy,” said Yusuf Mansawala. He is the chief market analyst at CPT Markets.

Meanwhile, in Europe, officials from the European Central Bank have voiced opposition to the market’s expectations for swift rate cuts this year. Moreover, Reuters’ technical analyst Wang Tao suggests that spot gold could retract to $2,042 per ounce following its repeated inability to surpass the $2,060 resistance level.

Other precious metals also declined, with spot silver falling 0.4 percent to $23.11 per ounce, platinum dropping 0.6 percent to $909.37, and palladium decreasing 0.7 percent to $964.89.

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