Gold Price Forecast XAU/USD – Pressured as Fed Speakers Suggest 50-Basis Point Rate Hike

Gold futures are under pressure on Friday and in a position to close lower for a third straight week. Rising Treasury yields and a stronger U.S. Dollar are weighing on demand for bullion. The catalysts behind the selling pressure are hotter-than-expected U.S. economic data and fresh hawkish remarks from U.S. Federal Reserve officials.

At 10:11 GMT, April Comex gold futures are trading $1832.60, down $19.20 or -1.04% and the XAU/USD is at $1823.72, down $10.71 or -0.58%. On Thursday, the SPDR Gold Shares ETF (GLD) settled at $170.76, down $0.13 or -0.08%.

Treasury Yields Higher in Early Trade

Helping to pressure gold prices early Friday are rising U.S. Treasury yields. The yield on U.S. Treasurys climbed as investors digested higher-than-expected wholesale inflation figures and considered what that could mean for Federal Reserve policy moves, CNBC said.

At 09:39 GMT, the yield on the 10-year Treasury was up by more than five points to 3.9018%. The 2-year Treasury yield was trading at 4.6892% after climbing by more than seven basis points.

Thursday’s producer price index reading for January came in higher than expected, causing investors to fret about inflationary developments and upcoming Fed monetary policy decisions.

Wholesale prices increased by 0.7% on a monthly basis in January after having declined by 0.5% in December. Economists previously surveyed by Dow Jones had expected January’s PPI to rise by 0.4%.

Data released earlier this week showed that consumer inflation rose by 0.5% in January, which was also a larger-than-expected increase.

Fed Could Raise Rates 50-Basis Points

Several Fed speakers hinted at further interest rate hikes after the data was released on Thursday. The central bank has been using rate increases as a tool aiming to cool the economy and ease inflation.

Many investors have been hoping for the central bank to pause rate increases this year as they are concerned that high interest rates will cause the U.S. economy to contract, or worse – enter a recession.

Two Federal Reserve officials said on Thursday the U.S. central bank likely should have lifted interest rates more than it did early this month, and warned that additional hikes in borrowing costs are essential to lower inflation back to desired levels, Reuters reported.

Cleveland Fed President Loretta Mester, who does not have a vote on the policy-setting Federal Open Market Committee (FOMC) this year, said she thought even before the release of the jobs and CPI data that her colleagues were not being aggressive enough with their most recent rate hike. “I saw a compelling economic case for a 50-basis-point increase,” she said.

In a separate conversation with reporters, St. Louis Fed President James Bullard, who also does not hold a vote on the FOMC this year, agreed there was a good case for the Fed to have been more aggressive with its recent rate decision. “I was an advocate for a 50-basis-point hike and I argued that we should get to the level of rates the committee viewed as sufficiently restrictive as soon as we could,” Reuters reported.

Short-Term Outlook

The news is bearish so we expect gold to continue to weaken until traders price in the possibility of a 50-basis point rate hike in March or at least three more 25-basis point rate hikes in March, May and June.

Gold has been rallying since November on the narrative that the Fed was moving closer to pausing its rate hiking campaign and perhaps cutting rates before the end of the year. It now looks as if the Fed will continue to raise rates until June with no rate cut this year.

Long gold investors are currently trimming their positions to account for the shift in the previously bullish narrative.