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Commodity Market: Gold eases from two-week highs as expectations of a 50 bp Fed rate hike bolster US Treasury yields, dollar

Spot Gold eased from recent two-week peak on Friday, as the US Dollar firmed and US Treasury yields rose above 2% for the first time in 2 1/2 years on expectations the Federal Reserve will probably raise interest rates in March in response to hot consumer inflation data.

Annual CPI inflation in the United States surged more than expected in January, to 7.5%, which has been the highest rate since February 1982.

Expectations that the US central bank will probably take a stronger stand against inflation, by introducing a 50-basis point rate hike next month, sent 10-year US bond yields to highs unseen since August 2019, while also lifting the US Dollar to one-week highs.

“The gold market is going to move between rate hikes and higher yields being major headwinds, and support from inflation concerns and high commodity prices,” Harshal Barot, a senior research consultant for South Asia at Metals Focus, was quoted as saying by Reuters.

Although Gold is often used as a hedge against inflation, it tends to be very sensitive to increases in US interest rates. It is so, as higher rates usually translate into higher opportunity cost of holding Gold which pays no interest.

As of 9:43 GMT on Friday Spot Gold was inching down 0.06% to trade at $1,825.56 per troy ounce. Yesterday the yellow metal rose as high as $1,841.96 per troy ounce, which has been its strongest price level since January 26th ($1,850.11 per troy ounce).

The commodity looked set to register its second consecutive week of gains, while being up 1.02%.

Meanwhile, Gold futures for delivery in April were losing 0.57% on the day to trade at $1,826.95 per troy ounce, while Silver futures for delivery in March were down 2.33% to trade at $22.973 per troy ounce.

The US Dollar Index, which reflects the relative strength of the greenback against a basket of six other major currencies, was inching up 0.08% to 95.868 on Friday. Earlier in the trading session the DXY went up as high as 96.053, which has been its strongest level since February 3rd (96.250).

Near-term investor interest rate expectations were little changed. According to CME’s FedWatch Tool, as of February 11th, investors saw a 96.7% chance of the Federal Reserve raising interest rates to the 0.50%-0.75% range at its policy meeting on March 15th-16th, compared to a 93.8% chance on February 10th.

“If rate markets continue to price the sort of hawkishness from the Fed – that was roughly articulated by Jim Bullard last night – the fundamentals necessitate a much lower gold price,” IG Markets analyst Kyle Rodda said.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – $1,830.12
R1 – $1,838.57
R2 – $1,850.42
R3 – $1,858.87
R4 – $1,867.32

S1 – $1,818.28
S2 – $1,809.83
S3 – $1,797.98
S4 – $1,786.14

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