Gold is set for weekly drop on hawkish Fed comments

Fears of an escalation in the Ukraine war pushed gold to a three-month high earlier this week

Gold prices were headed for the first weekly decline in three weeks after several US Federal Reserve policymakers signalled that they were unwavering in their fight against inflation and any talk of a pause in rate hikes was premature.

Spot gold rose 0.1% to USD 1,762.10 by 9.15 am GMT on Friday, 18 November, down about 0.5% on the week. Gold futures were also 0.1% higher than the previous days close, at USD 1,765.45 on Friday morning.

In the most recent comments by US rate setters, St. Louis Federal Reserve President James Bullard said that Fed interest-rate increases have further to go to curb the pace of price increases.

The US policy rate was not yet "sufficiently restrictive," Bullard, who is a voting member of the rate-setting Federal Open Market Committee, said in a 17 November speech.

"Thus far, the change in the monetary policy stance appears to have had only limited effects on observed inflation," Bullard said. He added that US  rates may need to go to between 5% and 7% by the time the Fed ends its tightening cycle, which is higher than what most analysts currently predict.

A US retail sales report on 16 November signalled steady demand by US consumers, fanning expectations that US rates need to be much higher to curb inflation.

US retail sales rose 1.3% in October from September, at their steepest rate in eight months, after stagnating in the previous month, the Commerce Department said. The reading topped economists forecasts for a 1% increase. Excluding volatile car and fuel sales, retail spending was up 0.9% in october.

Another us monetary policy maker, San Francisco fed president Mary Daly told CNBC on 16 november in an interview that the Fed isnt yet considering taking a break from increasing rates.

"Pausing is off the table right now," Daly said. "Its not even part of the discussion."

Gold reached a three-month high of USD 1,786 per ounce on 15 november on concern of an escalation in Russia's war against Ukraine after reports that missiles killed two people in poland near the ukraine border.

The tension eased after Poland and the country's NATO allies, including, US president Joe Biden, said the missiles were not from Russia, but probably fired by Ukrainian defence.

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Gold price performance since mid-year

 

The US dollar index (DXY), which measures the US currencys strength against a basket of its major counterparts, slipped 0.1% on Friday. It was up 0.2% on the week.

Gold rose more than 4% last week after a report showed inflation may be slowing, fuelling speculation that the Fed will turn less aggressive in its rate increases.

 

US consumer prices rose 7.7% in October from the same month last year, compared with an 8.2% annual increase in September, according to the 10 November report. Economists had expected an 8% increase.

Rising US interest rates this year have been driving up safe-haven demand for the dollar, helping the DXY touch a 20-year high. This erodes the safe-haven appeal of holding gold, which pays no interest.

Gold prices have been under pressure since the Fed began its rate hike campaign in March to fight the fastest inflation in more than 40 years.

The Fed has raised US interest rates in four large, 75-basis-point steps, to a range of 3.75% and 4.00% by early November. Rates were near zero at the beginning of the year.

US monetary policy makers are expected to raise their target rate again in December, but at a smaller scale. Futures pricing now predicts an 81% probability of a 50-basis point rate hike at the Feds 14 December policy meeting, according to the CME Groups FedWatch Tool.

Any easing in US inflation or signs the Fed was scaling back the pace of rate increases would support the gold price.

 

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