Gold pares some losses as the Dollar retreats from highs

LONDON (December 19) Gold (XAU/USD) trades higher on Thursday, regaining some of the ground lost on Wednesday after the Federal Reserve’s (Fed) monetary policy decision. At the time of writing, the precious metal has reached the $2,620 area after bouncing from $2,580 lows the prior day.

The Fed cut rates as expected but raised its growth and inflation expectations and scaled down the interest rate cut projections for next year. This, coupled with an unusually hawkish tone from Fed Chairman Jerome Powell, triggered a risk-averse reaction, sending the US Dollar Index (DXY), which tracks the USD value against six major currencies, to test two-year highs and crushing Gold and equities.

Higher US yields and a strong USD are likely to limit Gold’s recovery 

• As widely expected, the Federal Reserve cut rates by 25 basis points (bps) to the 4.25%-4.50% range on Wednesday. However, policymakers slashed their easing projections to just two rate cuts in 2025 from the four cuts estimated in September.
   
• Next year’s Personal Consumption Expenditures (PCE) inflation expectations were increased to 2.5% from 2.1% in September. Chairman Powell suggested that some officials considered the impact of Trump’s policy expectations on their inflation projections.
   
• Likewise, US economic growth expectations were revised to 2.5% this year and 2.1% in 2025, from previous estimations of steady 2.0% GDP growth in both years.
   
• The labour market is also expected to be more resilient. The unemployment rate is expected to be 4.2% this year and 4.3% next year, down from the 4.4% previously foreseen for those two years.
   
• The central bank’s projections and an unusually hawkish tone from Fed Chairman Jerome Powell sent US Treasury yields rallying. The benchmark 10-year yield has reached levels above 4.5% after rallying about 40 basis points from last week’s lows.
   
• In the US, the focus now is on Friday’s US Personal Consumption Expenditures (PCE) Prices Index figures for November to compare them with the bank’s inflation expectations. A softer-than-expected reading would ease the risk-averse mood and provide some support for Gold.

FXStreet