Gold futures are moving higher on Thursday amid a slide in 10-year Treasury yields and a weaker U.S. Dollar. The catalyst behind today’s early weakness is yesterday’s comments from Federal Reserve Chairman Jerome Powell that smaller interest rate hikes could start in December.
Powell Signals Slowdown in Pace of Rate Increases
Gold rallied late Wednesday after Powell said the central bank could scale back the pace of its interest rate hikes as soon as December, while cautioning the fight against inflation was far from over and that key questions remain unanswered, including how high rates will ultimately need to rise and for how long.
Powell, in remarks prepared for delivery at the Brookings Institution think tank in Washington, did not indicate his estimated “terminal rate,” but said it is likely to be “somewhat higher” than the 4.6% indicated by policymakers in their September projections, Reuters reported.
Treasury Yields Fall as Traders Assess Fed Policy Outlook
Treasury yields declined on Thursday as traders digested comments from Powell on the Fed’s interest rate policy plans. The slide in yields helped make non-yielding gold a more attractive asset.
Powell’s tone echoed that of other Fed speakers, who in recent weeks have emphasized to gold traders that rates would continue to rise, but in smaller increments.
Gold prices fell sharply during the period from March to November, where the central bank implemented four consecutive 75 basis point rate hikes, but has rallied more than $100 dollars since early November as traders started to price in the probability of a 50 basis point increase from its December meeting.
Ahead of Powell’s speech, the markets were pricing in about a 65% chance that the Fed would step down its interest rate increases to half of a percentage point in December. Following Powell’s speech, the probability for a half-point move rose to 77%.
Dollar Drops as Yields Fall
The U.S. dollar is down on Thursday and is rapidly approaching a major August bottom that could trigger the start of a steep decline. Falling Treasury yields are making the dollar a less-attractive investment. This, in turn, is helping to generate strong foreign demand for the dollar-denominated asset.
On Thursday, gold traders could be facing another volatile session as new reports could tell the markets how high interest rates and inflation are affecting consumers. This will be revealed in today personal spending and income figures for October. Traders will also get another look at inflation in the Core PCE report.
The release of ISM’s Purchasing Managers Index (PMI), which reflects whether factory activity is growing or contracting, will provide additional hints about the state of the broader U.S. economy. Last month’s figures reflected the slowest activity growth since mid-2020.
Gold prices could continue to rally if the data suggests a weakening economy because this could encourage the Fed to slow rate hikes further in the future. However, don’t be surprised if gains are pared late in the session as investors trim positions ahead of Friday’s Non-Farm Payrolls report.