The comments from Fed’s Dudley had a substantive impact with markets more confident of a March rate hike. Strong gains for the dollar and an increase in Treasury yields put significant downward pressure on gold prices.
There was hawkish rhetoric from Fed speakers overnight with San Francisco Fed President Williams stating that a March rate increase should be given serious consideration, especially with a strong labour market and rising inflation. According to Williams, the Fed needed gradually ease monetary stimulus in order to avoid the economy overheating.
Comments from New York Fed President Dudley were even more important as he stated that the case for an increase in interest rates had become much more compelling. Dudley made reference to a surge in consumer and business confidence as well as strength in equity markets.
Given Dudley’s pivotal Fed role, the comments increased speculation that the Fed would move to tighten policy at the March meeting. US bond yields moved higher with 10-year yields above 2.40% and USD/JPY advanced strongly to above 113.00.
This combination was important in undermining gold and prices weakened to below $1,250 per ounce.
In his speech to Congress, President Trump did not provide any details on tax plans, although the dollar was broadly resilient after the Fed comments.
The tone of the speech was more conciliatory and less confrontational which helped underpin risk appetite and there was no increase in defensive gold demand.
In this environment, gold retreated to lows near $1,242 and was only able to gain limited respite in Asia as the dollar maintained a robust tone.
Although the US PCE inflation data was fractionally below expectations, bond markets remained under pressure with the US 10-year yield moving above the 2.45% level. The dollar also gained further traction against the majors with USD/JPY testing resistance near 114.00.
This combination put further downward pressure on gold with a retreat to below $1,240.
The latest US ISM data will be watched closely, although commentary from Fed speakers is liable to have a more substantial impact on asset prices as the March FOMC meeting remains a key focus. Hawkish rhetoric from Fed Governor Brainard would be another important marker while a dovish tone could trigger a reassessment.
Gold Prices 4-Hour Chart