The positive macroeconomic data releases have pushed markets to price in tighter financial conditions. The hawkish Federal Reserve meeting minutes released this week revealed that “a few” FOMC members were leaning toward a 50-basis-point hike rather than the more dovish 25-bps increase adopted at the February meeting. Markets are already pricing in three 25bp FED rate hikes by summer, with rates remaining above 5% through 2023.
Furthermore, the FED’s preferred inflation measure, the annual core PCE price index, increased in January, coming in at 4.7 percent versus the expected 4.3 percent. Elevated inflation and a tight labour market, combined with a resilient economy that is likely to avoid recession, provide a solid foundation for the US central bank to continue raising interest rates until inflation is controlled, without serious concerns that such action would harm economic growth..
It is the macro-economic outlook that is weighing on gold. The precious metal rose in January on speculation that the Fed would cut interest rates at the end of 2023. The reality is beginning to sink in. And today’s inflation figures confirm this. And the market is feeling the effects of the rate hike. The good news for gold is that this rate re-pricing is also having an effect on the equity market. And if the S&P 500 and Dow continue to fall, gold may find some support as a safe-haven asset. This should put a floor under the price of gold.
The positive macroeconomic data releases have pushed markets to price in tighter financial conditions. February Flash PMIs outperformed expectations in both the eurozone and the United States, with activity in the services sector recovering faster than many expected. Price indicators provided more mixed signals, with input price pressures appearing to ease while output prices continue to rise rapidly..
Given gold’s natural tendency for quick selloffs and recoveries during times of panic, there is no extremely strong floor in place right now. I wouldn’t be surprised to see gold fall below $1800, with expectations that it will quickly recover if the situation in Ukraine worsens. Technically, Gold has fallen further at Rs 55400. This increases the likelihood of further losses towards the long-term 200-DMA, currently seen around Rs 54900-55000, which I expect to floor the precious metal and will offer an opportunity to buy.