Gold prices edges higher on Thursday, supported by a softer dollar, as investors awaited cues from the US Federal Reserve following the Bank of Canada's surprising rate hike. While bullion hovered near the previous session's lows, it made modest gains in anticipation of the Fed's decision to hold rates, contrasting with the Bank of Canada's move to raise rates to a 22-year high.
Spot gold rose 0.4% to $1,946.47 per ounce, recovering from a 1% drop in the previous session. US gold futures also saw a slight increase of 0.1% to reach $1,961.00. Analysts believe that gold prices have remained stagnant within the range of $1,930 to $1,985 due to expectations of the Fed maintaining current interest rates. However, once the US central bank announces its decision, bullion prices could potentially breach the upper range.
The Bank of Canada surprised the markets by raising its overnight rate to a 22-year high of 4.75%. Analysts and investors immediately speculated about the possibility of another rate increase next month as the bank aims to cool down an overheating economy and combat stubbornly high inflation. The contrasting monetary policies between Canada and the United States contribute to the uncertainty surrounding gold prices.
According to US Treasury Secretary Janet Yellen, the US economy remains strong, supported by robust consumer spending. However, there are signs of certain areas slowing down. Yellen expressed confidence in the future progress of bringing inflation down over the next two years. The upcoming US consumer inflation report for May, scheduled to be released before the Fed meeting, will provide investors with a clearer picture of the overall health of the world's largest economy.
As interest rates rise, the appeal of gold, which yields no interest, diminishes. This phenomenon explains why some analysts have adjusted their price targets for gold. Citi, for example, reduced its zero-three month gold point-price target to $1,915 from $2,100. However, Citi also emphasized that gold remains a viable macro portfolio tail hedge, even in a potentially hawkish Fed regime, highlighting its resilience and potential for investors.
Gold, as a popular safe-haven asset, is closely monitored by forex traders due to its sensitivity to global economic and geopolitical developments. The anticipated decision of the US Federal Reserve regarding interest rates has a significant impact on currency markets. Forex traders often analyze the movements in gold prices as they provide insights into market sentiment and risk appetite. The contrasting monetary policies of the Bank of Canada and the Fed add an additional layer of complexity to forex trading strategies, as currency exchange rates can be influenced by these central bank decisions. Keeping a close eye on gold prices and the decisions of central banks is crucial for forex traders looking to make informed trading decisions and manage risk effectively.