- The Fed meeting and Russia-Ukraine talks are the key drivers of gold price.
- Investors expect the Fed to hike interest rates by a quarter of a percentage point.
- Russia-Ukraine talks have exuded optimism despite the reported airstrikes by Russian troops.
Fed meeting
Gold price is in the red for the third session in a row as investors await the March Fed meeting. The Federal Open Market Committee (FMOC) is set to begin its two-day meeting on Tuesday, which will culminate into an interest rate decision on Wednesday.
Investors expect the US central bank to hike interest rates in this week’s meeting as it strives to ease the heightened inflationary pressures. As recently highlighted by the Fed Chair – Jerome Powell – it will likely increase rates by a quarter basis point. Based on the CPI numbers released in the past week, inflation is at its highest level in 40 years at 7.9% YoY. US producer prices and retail sales are also set for release on Tuesday and Wednesday, respectively.
Notably, an environment of higher interest rates is usually a bearish driver of gold price. This is because it increases the opportunity cost of holding the non-yielding bullion. Earlier on Tuesday, the benchmark 10-year Treasury yields rallied to 2.16%, its highest level since June 2019. As of the time of writing, it has eased to 2.10%.
However, even with the expected rate hike, investors will be keen on the tone of the US central bank. A mildly hawkish Fed may offer support to the gold price. This is further substantiated by the fact that inflation is set to remain elevated in the foreseeable future.
Russia-Ukraine talks
Gold price is further reacting to developments in the Russia-Ukraine crisis. Granted, the war is ongoing, with a Russian airstrike hitting a Ukrainian military base located close to NATO member Poland on Sunday. Besides, several airstrikes were reported to have hit several residential buildings in the major cities of Kharkiv and Kyiv.
Even so, negotiators from both sides have exuded optimism that the talks have taken a positive turn. On Friday, President Putin indicated that the Russia-Ukraine talks had made a “positive shift.” Since then, negotiators from both sides have indicated that an agreement may be reached in the near future.
In previous talks, the focus was on humanitarian issues. The negotiations have since evolved with Ukraine seeking a ceasefire, enactment of security guarantees, and the withdrawal of Russian troops from the country.
The ongoing peace talks and heightened optimism that the situation in eastern Europe will be resolved in the coming days have reduced the demand for safe havens. Notably, an escalation of the war in the past week boosted the gold price to its highest level since August 2020; about $5 shy of its all-time high of $2,071.95.
However, since Friday, spot gold has been trading below the psychological level of $2,000 amid hopes that the Russia-Ukraine war will soon end. In the ensuing sessions, it will likely be subject to price swings as investors assess the situation in Ukraine. Even with an increase in interest rates, the lack of a breakthrough in the ongoing talks will likely yield a bounce-back in the gold price.
Gold price technical analysis
On a daily chart, the gold price is still above the 25 and 50-day exponential moving averages even as it extends its previous losses. As of 09:00 am GMT, the precious metal was at 1,933.31. In the short term, I expect it to trade within a horizontal channel of between 1,955.16 and 1,925.96.
An aggressive tone from the Fed and/or breakthrough in Russia-Ukraine talks may push it lower to 50-day EMA at 1,888.98. On the flip side, a higher safe-haven demand may have it bounce back to around 1,988.25.
