Golden prospects

Gold prices are on the rise through the Asia-Pacific session after an overnight bout of strength following the Federal Reserve’s rate decision. Gold initially saw a sharp drop in reaction to the FOMC’s updated summary of economic projections, which showed a more aggressively hawkish “dot plot”- the expected rate hike path through 2024 - and an elevated outlook on inflation. That sent yields higher along the curve, but the short-term 2- and 5-year yields outpaced longer-dated ones. 

A flattening of the yield curve can be seen as a sign that economic growth is expected to cool. But, investors’ outlook on central bank policy also plays a role. The yield curve likely flattened overnight due to the initial hawkish interpretation given by the FOMC statement and updated SEP. Indeed, at face value, it certainly was a hawkish statement, with the pace of tapering sped up in addition to the aforementioned factors. However, that initial reaction faded, and markets shifted back into a risk-taking stance shortly after Fed Chair Jerome Powell took the podium. 

Bullion prices proceeded to trim losses and moved into positive territory through last night’s post-FOMC action as markets unwound that initial hawkishness. That positive price action likely owes gold’s tendency to outperform in low-rate environments. The yellow metal is also strongly influenced by US Dollar strength. As the Greenback is more sensitive to short-term Treasury yields, the post-FOMC steepening of the curve sapped USD strength, which in turn benefited bullion.

Rates remain low across the world from a historical perspective, so it stands to reason that gold remains relatively attractive to investors. That said, tonight will see interest rate decisions from the European Central Bank and the Bank of England cross the wires. While they don’t have as much influence over the yellow metal as Treasuries, European bond yields and UK Gilt counterparts still have the capacity to inspire price moves. So, a relatively hawkish ECB or BoE surprise may cull gold strength.