Gold prices faced a decline of 1.2% to $2309
per troy ounce over the course of this week, with a sharper drop of 2.4%
observed on May 1, bringing prices down to $2281 per ounce. However, prices
rebounded following the Federal Reserve (Fed) meeting held on Wednesday.
Investors had been eagerly anticipating the
Fed's decisions amidst the backdrop of accelerated inflation in February and
March. It was widely expected that policymakers would adopt a hawkish stance in
response. However, the Fed surprisingly opted for a dovish approach. They
announced a reduction in the Treasury runoff from its balance sheet, cutting it
to $25 billion from $60 billion starting June 1. This move signifies a slower
pace of quantitative tightening than initially anticipated. This decision
appeared to contradict previous statements from Fed Chair Jerome Powell
regarding persistently high inflation levels, which have consistently exceeded
expectations. Recent data indicated that inflation is running at 3.5% YoY,
significantly surpassing the 2.0% target.
Market reaction to the Fed's decision was
subdued, with U.S. 10-year Treasuries yields decreasing marginally to 4.61%
from 4.64%. Bets on interest rate cuts by the Fed remained largely unchanged,
with probabilities at 11.7% in June, 27.6% in July, and 43.3% in September,
according to the CME FedWatch Tool.
One plausible explanation for the Fed's dovish
stance could be their reluctance to take more aggressive actions to curb
inflation ahead of the U.S. presidential elections scheduled for November.
However, such contradictory signals from the Fed may exacerbate the risk of
inflationary pressures by injecting more liquidity into the financial markets,
potentially leading to higher debt market yields and worsening financial
conditions. This could subsequently trigger a correction in the stock market
and strengthen the U.S. Dollar, consequently driving gold prices down.
Meanwhile, oil prices are on a downward
trajectory, with Brent crude prices declining by 5.0% to $84.10 per barrel this
week. This downward trend in oil prices could alleviate inflationary pressures.
However, if oil prices continue to slide below the $80.00-82.00 per barrel
range, it could negatively impact stock indexes. This potential scenario might
influence the Fed's decision-making process, as they aim to convey dovish
intentions without resorting to interest rate cuts. Investors are also
contemplating the possibility of a stock market correction in May and June.
Gold prices are currently grappling with
overbought conditions, which are exerting downward pressure. The ongoing
correction may be prolonged if prices breach the support level at $2290-2310
per ounce, with the next downside target situated at $1960-2000. The SPDR Gold
Trust (GLD) reported net capital inflows of only $22.4 million during the last
week, compared to $397.0 million in the previous week, indicating a waning
upside momentum for gold.
The forthcoming U.S. labor market report for
April, set to be released this Friday, will serve as another pivotal event for
the bullion. A continuation of strong labor market conditions could potentially
drive gold prices below the support level at $2290-2310 per ounce.
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