Gold heads for weekly drop as central banks signal more rate hikes are to come to fight inflation

Gold was on track for its biggest weekly drop since mid-November after major central banks indicated that they had a lot more work to do to curb inflation and rate increases were set to continue.

The US Federal Reserve, the European Central Bank and the Bank of England all raised their benchmark interest rates by 50 basis points this week. While for the Fed, this step meant a slowdown in the pace of rate increases after four, 75 basis-point mega hikes in the previous four meetings.

US policymakers also warned that US interest rates are likely to peak at higher levels than expected by economists and traders. Higher rates diminish gold’s appeal, which pays no interest, compared to interest-bearing instruments, such as the US dollar and US Treasury notes.

The Fed’s interest rate target range is now between 4.25% and 4.50%, compared with nearly zero at the beginning of the year. Fed officials expect the current rate-increase campaign to peak at 5.1% according to the 'dot plot,' a chart of individual member's expectations. 

“We have covered a lot of ground, and the full effects of our rapid tightening so far are yet to be felt,” Fed Chair Jerome Powell said at a 14 December press conference following the rate decision. “Even so, we have more work to do.”

He added  that the October and November inflation data showed “a welcome reduction” in the monthly pace of price increases, “but it will take substantially more evidence to give confidence that inflation is on a sustained downward path.”

Elsewhere, European Central Bank President Christine Lagarde said that “significant” further rate rises at a “steady pace” were still to follow, after the ECB lifted its key rate to a 14-year high of 2% from 1.5% on 15 December. Similarly, the Bank of England carried out its ninth consecutive rate increase on the same day, taking the key UK interest rate to 3.5% from 3%. 

A major factor for the gold price, the US dollar, jumped 0.9% on Thursday, 15 December, based on the dollar index (DXY), which tracks the value of the greenback against six of its major counterparts. This spike was caused by fears among investors that the rate increases will trigger deeper recessions in the world’s major economies than expected.

Overall, the US currency saw little change on the week. The gold price and the US dollar tend to move inversely, because a weaker US currency makes gold contracts, which are priced in US dollars, cheaper in other currencies. 

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