Yahoo Finance Gold slumps after hawkish Federal Reserve outlook
Gold (GC=F) prices slid sharply on Thursday, down more than 2% on the day, after a hawkish outlook from the Federal Reserve caused a rise in yields and stronger US dollar.
The safe-haven asset saw one of its largest drops since January, and was trading at $1,797 (£1,825) in afternoon trade.
It came as the US Federal Reserve updated its “dot plot” last night, showing it has pulled forward its first expected post-pandemic rate rise to 2023 as it looks to prevent overheating in the US economy.
The dot plot which maps out each member’s expectations for rates over coming years; in March of this year it showed the median member expecting no rate hikes through that time horizon.
The upward revision suggests that the Fed sees a faster-than-expected recovery.
On Wednesday, the voting numbers of the Federal Open Market Committee (FOMC) held interest rates at near-zero, and reiterated for now its commitment to its asset purchase programme, which is absorbing about $120bn (£85bn) a month in assets.
“Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain,” the Federal Open Market Committee said in a statement.
Read more: Fed holds rates at near zero, projects two possible rate hikes by end of 2023
Bonds fell on the back of the news, with US 10-year yields up to 1.59% before easing back a touch to 1.56% on Thursday morning, and the 2yr hitting its highest in a year. The dollar also rallied against the pound (GBPUSD=X) and the euro (EUR=X) on expectations of tighter US monetary policy.
The currency was up 0.2% and at a 6-week peak against sterling, and made a 0.6% increase against the euro, sending the greenback to a 2-month high.
“This unexpectedly hawkish tilt saw yields on US government bonds rise sharply, while US stocks rolled over, slipping to the downside, though the eventual losses were fairly well contained,” Michael Hewson of CMC Markets said.
“If the markets really were spooked by last night’s slight change in stance, then you would have expected a slightly bigger reaction stock market wise.”
He added: “This reaction may serve as a useful reminder that while central banks may seem fairly relaxed about the inflation outlook, they still have to look a lot further out, and realistically if the economy improves as expected, monetary policy will have to change.
“The fact that the Federal Reserve are slowly preparing the ground now may well be unsettling for markets but it is also necessary, and in the here and now, monetary policy still hasn’t changed that much.”
Watch: The Federal Reserve to raise interest rates sooner than expected
