Despite gold heading towards its worst weekly performance in 6 weeks, the dollar is poised to record its second consecutive weekly gains, amid signs of flexibility in the US economy and caution regarding central banks cutting interest rates, as traders reduce expectations of a sharp interest rate cut. Markets are factoring in a 57% chance of a US interest rate cut in March, compared to 75% last week.
Richard Franulovich, head of foreign exchange strategy department at “Westpac”, said that the message derived from US activity data and central bank officials is that the markets are extremely stringent in their expectations of interest rate cuts in 2024, both in terms of timing and magnitude.
The revenues of the two-year treasury bonds, which are based on short-term interest rate expectations, increased by 22 basis points to 4.3587% this week.
The dollar index rose by 0.9% to 103.4 during the week, while the yen was the biggest loser, having fallen by 5% so far this year. The destructive earthquakes have eroded confidence that the Bank of Japan is approaching an interest rate hike.
In the metals market, gold prices have risen during Friday’s trading, but they are on track to record their worst weekly performance in 6 weeks due to the increase in the dollar and Treasury bond yields after Federal Reserve officials debunked expectations of an early interest rate cut.
The immediate price of gold rose by 0.2% to a level of $2027.39 per ounce, but it has declined by over 1% during the week’s trading so far. Meanwhile, US gold futures rose by 0.4% to a level of $2029.60.
According to Reuters agency, Hugo Pascal, a precious metals trader at “Inbrovad”, said that the precious metal came under pressure as traders adjusted their expectations of interest rate cuts following better-than-expected data and hawkish statements from Federal Reserve officials.
He also emphasized that this trend overshadowed the bonus of secure assets, which resulted from geopolitical risks in the Middle East.
While the “DXE” dollar index has risen by 1% so far this week, yields on 10-year US Treasury bonds have reached their highest level in five weeks at 4.1730%.
In a recent research memo, Rafael Bostic, President of the Federal Reserve Bank in Atlanta, predicts that interest rates will be cut sooner than expected based on the speed of inflation decline, but the baseline scenario is to start reducing interest rates in the third quarter.
Currently, markets are betting on a reduction in interest rates by 141 basis points during this year, down from last week’s 150 basis points. The chances of a rate cut in March have also decreased from 71% to 55% compared to last week.
In terms of other precious metals, the spot price of silver rose by 0.2% to around $22.79 per ounce, while platinum increased by 0.6% to a level of $912.78.
