SUPERNEWS

Macro

Gold at $2,335 Amid US Inflation, Fed Rate Cut Doubts

Gold steadies at $2,335 amid global rate cut recalibration and persistent US inflation, challenging rate-cut expectations.

By Barry Stearns

ᐧ

4/28, 20:59 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
article-main-img

Key Takeaway

  • Gold steadies at $2,335 an ounce after a 2% drop last week, amid brisk US inflation and reduced rate-cut expectations.
  • Swaps traders now anticipate only one Fed rate reduction this year, impacting gold's appeal as higher rates make non-yielding assets less attractive.
  • Despite easing Fed cut expectations and gains in the dollar and US Treasury yields, gold has surged over 13% this year due to central-bank purchases and strong demand from Asia.

Gold's Resilience Amid Rate Hike Expectations

Gold steadied near $2,335 an ounce after a more than 2% drop last week, showing resilience despite the Federal Reserve's expected reaffirmation of higher-for-longer interest rates in the upcoming midweek meeting. This stance typically poses challenges for gold, which doesn't yield interest, yet the precious metal has climbed over 13% this year. Factors such as central bank purchases and strong demand from Asian markets, notably China, have supported gold's ascent despite a stronger dollar and rising US Treasury yields.

Global Rate Cut Expectations Adjusted

Investors worldwide are recalibrating their expectations for interest rate cuts in light of persistent inflation pressures in the US, affecting forecasts for the European Central Bank (ECB) and the Bank of England (BoE) as well. James Knightley, chief international economist at ING, highlighted the global dimension of the Fed's inflation challenges, noting the potential for dollar strength to stress the European economy. The market now anticipates less aggressive rate cuts from the ECB and BoE, with the ECB expected to cut rates by about 0.7 percentage points this year, down from earlier, more optimistic forecasts.

Divergence in Monetary Policy

Despite the global shift in rate cut expectations, senior ECB and BoE officials argue their inflation scenarios differ from the US, suggesting a potential for earlier rate cuts in Europe. However, the Fed's recent data showing inflation at 2.7% for the year to March has dampened hopes for immediate rate reductions, with some traders even betting on Fed rate increases within the next 12 months. This divergence in monetary policy underscores the complex interplay between inflation, exchange rates, and central bank actions across major economies.