Gold trapped in range as Fed meeting looms, outlook clouded

Gold prices were trading in a tight range on Wednesday morning, hovering just below the key $1,800 per ounce level, as investors digested recent economic data ahead of the Federal Reserve’s interest rate decision. 

The labour market remained strong and inflation remained high, suggesting that the Fed might not pivot away from its hawkish stance as quickly as previously expected. As a result, investors were reluctant to take on more risk by holding non-yielding assets such as gold.

The volatile economic and political environment had led to large swings in gold prices in recent weeks, with spot prices hitting record highs above $2,100 an ounce before falling sharply to lose its perch above $2,000 an ounce. The volatility was driven in part by changing expectations of future Federal Reserve policy, with the U.S. dollar also experiencing wild swings. As the Fed has signaled that it is likely to keep rates elevated for longer than previously expected, the dollar has strengthened, putting pressure on gold.

In early trading on Wednesday morning, spot gold prices were hovering at $1,979.06 an ounce, with little movement from the previous day’s close. Meanwhile, gold futures expiring in February were relatively unchanged, trading at $1,993.70 an ounce. The lack of movement in the futures market suggested that investors were awaiting further information on the Fed’s plans before making any moves.

The Federal Reserve is widely expected to keep interest rates unchanged at its final meeting of 2023, scheduled for later in the day. However, investors will be paying close attention to Fed Chair Jerome Powell’s press conference, during which he is likely to provide more details on the central bank’s policy outlook for 2024. Many investors fear that the Fed will continue to take a hawkish stance on rates, meaning that it will prioritize fighting inflation over supporting economic growth.

In recent public remarks, Powell has reiterated his view that rates will remain high for an extended period of time. However, he has acknowledged that the Fed has made progress in bringing down inflation, which has come down from its highest levels in over 40 years earlier this year. Nevertheless, November’s inflation data showed that inflation was still well above the Fed’s target of 2 per cent per year.

Given the Fed’s persistent hawkish stance, any further indication of a prolonged period of high rates could spell more trouble for gold prices. In recent weeks, many investors have revised down their expectations for a rate cut by March 2024, and the market consensus now points to a cut coming later in the year. 

The implied probability of a rate cut by March 2024, as implied by the prices of Fed funds futures contracts, has fallen from 60 per cent last week to 43 per cent at the current time. This decrease in the likelihood of a rate cut has come amid a number of factors, including the recent strength of U.S. economic data and the Fed’s own signals on the path of policy. Higher interest rates make gold less attractive as an investment, since investors have to forgo the income that they could earn by investing in other assets with a higher yield.