During Tuesday’s trading session, gold prices showed a significant downward trajectory, trading near the key mark of $2025 per ounce. This downward trend is largely attributed to a stronger U.S. dollar and rising U.S. yields. Precious metals like gold are facing downward pressure as the U.S. economy shows resilience, but as long as dovish bets on the Fed remain elevated, the downside is limited.

The Fed keeps a close eye on core inflation, which unexpectedly rose in December. Additionally, they monitor the labor market, with data for the final month of 2023 showing strong performance, with job creation and income accelerating and the unemployment rate falling. While Fed officials remain cautious as an overheating economy could threaten their efforts to fight inflation, markets believe the easing cycle will begin in March, and those dovish bets could limit the downside for metals.

Currently, U.S. Treasury yields are rising. The 2-year rate is 4.20%, the 5-year rate is 3.90%, and the 10-year rate is 4%. Higher yields have drawn attention to the U.S. dollar, which tends to attract foreign investors.

According to the latest data from CME’s “Fed Watch”, the probability that the Federal Reserve will keep interest rates unchanged in the range of 5.25%-5.50% in February is 97.4%, and the probability of cutting interest rates by 25 basis points is 2.6%. The probability of keeping interest rates unchanged by March is 33.1%, the probability of a cumulative 25 basis point interest rate cut is 65.2%, and the probability of a cumulative 50 basis point interest rate cut is 1.7%.

Gold prices briefly rose last weekend. Strategists at Commerzbank analyzed, “The recent temporary rise in gold prices (at least in the media’s view) is due to lower expectations for U.S. interest rates on the one hand, and concerns about escalating conflicts in the Middle East after the Red Sea conflict intensified. The other. However. , we believe that the former may be the main driver of gold’s strength. In addition, concerns about escalating conflicts in the Middle East may mainly focus on the risk of another energy price shock. However, neither oil prices nor European gas prices have recently been able to recover from the increasing tensions. continue to benefit from the situation.”

Although gold prices have managed to maintain solid support above $2,000 an ounce, some analysts have noted that a shift in market momentum could weigh on gold prices in the short term.

The U.S. dollar is widely expected to continue lower this year, but its gains run counter to that expectation. Market speculation that the Federal Reserve will begin to loosen monetary policy and reduce the interest rate gap as early as March has attracted investors to the United States.

But the outlook is clouded by worries that traders are overestimating how easing policymakers will be. At the same time, escalating conflicts over the Red Sea shipping corridor and continued economic weakness in the Asian giants have fueled interest in the dollar as a temporary refuge from uncertainty.

But that outlook is being clouded by worries that traders are overestimating the extent to which policymakers will ease. At the same time, escalating conflicts along the Red Sea shipping corridor and continued weakness in China’s economy have increased interest in the dollar as a temporary safe haven.

Paresh Upadhyaya, head of fixed income and FX strategy at Amundi Asset Management, said: “The market has been overly optimistic about the Fed cutting interest rates. If you take into account any shred of risk aversion due to geopolitical risk or political uncertainty, then this will help through its Safe-haven status boosts dollar.”

The attack on the Red Sea route has raised concerns about further disruption to global trade and supply chains, which could exacerbate inflationary pressures. Houthi militants attacked a second commercial ship in a day, while Shell Plc suspended oil tanker shipments through the area.

Meanwhile, Chinese officials are considering stimulus packages that underscore the difficulties the world’s second-largest economy faces since emerging from pandemic lockdowns.

Amanda Sundstrom, fixed income and currency strategist at SEB AB in Stockholm, said: “I’m not surprised that optimism has weakened a bit at the start of the new year. Even though we still believe we are heading If you move in the right direction, you will encounter some setbacks.”

However, there are some signs that the dollar’s recent strength is not expected to fade anytime soon. While options traders are cautious about further strength in the near term, the risk reversal shows the most bullish sentiment toward the U.S. dollar in a month.

The euro fell to a one-month low of $1.0863 against the dollar on Tuesday. The U.S. dollar rose to its highest level against the yen in nearly six weeks, and continued its gains in Asia on Wednesday, reaching a maximum of 147.47, a new high since December 6. The Australian dollar and some Scandinavian currencies – often a barometer of global risk sentiment – fell more than 1% on Tuesday.

Supporting the bullish view on the dollar is a growing number of investors and analysts who believe the interest rate swap market is pricing in rate cuts from major central banks this year too aggressively.

Traders have been overestimating the Fed’s hawkishness since the end of the pandemic. Robert Holzmann, a member of the European Central Bank’s Governing Council, said in an interview on Monday that threats posed by persistent inflation and geopolitical risks will prevent the European Central Bank from cutting interest rates this year.

“The tone from central bankers this morning, particularly from the ECB, is hesitant,” said Thierry Weitzman, global head of currencies and rates strategist at Macquarie Futures, due to the Red Sea and Panama Canal disasters. , rising freight rates have once again stoked concerns about supply chain disruptions. “That’s why they sound less dovish.”