Gold prices witnessed a continued decline during Asian trading hours on Wednesday, propelled by growing skepticism regarding early interest rate cuts by the Federal Reserve. The situation was exacerbated by a resurgence in the dollar, impacting prices across the precious metal market.
The downward trajectory in gold prices commenced on Tuesday when Federal Reserve Governor Christopher Waller’s comments indicated a cautious stance on potential rate cuts. Waller emphasized the recent resilience of the U.S. economy, further delaying any prospects of reductions in interest rates. Consequently, the dollar surged to a one-month high, triggering a substantial rise in Treasury yields, with the 10-year rate surpassing the 4% threshold.
The cautious approach towards rate cuts by the Federal Reserve and the resulting surge in the dollar offset the previously observed safe-haven demand for gold. Traders shifted their focus away from the yellow metal and towards the dollar, given the prospect of higher U.S. interest rates.
At 00:20 ET (05:20 GMT), spot gold experienced a 0.4% decline, reaching $2,019.70 per ounce, while gold futures expiring in February dropped by 0.4% to $2,022.90 per ounce. Both instruments had already witnessed declines exceeding 1% on the preceding Tuesday.
As attention now turns to forthcoming industrial production and retail sales data for December, analysts are closely monitoring any indications of strength in the U.S. economy, particularly in consumer spending. Positive signals in these areas could provide the Federal Reserve with more flexibility to maintain higher interest rates for an extended period.
Traders, utilizing the CME Fedwatch tool, have slightly reduced their expectations of a March rate cut, with the market now indicating a 62.8% probability of a 25 basis point cut—down from the 66.1% observed the day before.
The prevailing trend of higher interest rates has increased the opportunity cost of investing in gold, limiting capital inflows into the precious metal as traders seek more lucrative yields in the debt market. This pattern has been a contributing factor to gold’s decline over the past two years.
While geopolitical tensions, such as increased military actions in the Middle East, have prompted some safe-haven demand for gold, this has been counteracted by traders opting for the safety of the U.S. dollar. Nevertheless, gold remains poised to benefit from a potential decline in U.S. interest rates later in the year.