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XAU/USD remains below $2,000 as the market awaits the Federal Reserve's policy decision

Alina Haynes

Mar 21, 2023 14:02

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On Monday of this week, gold prices reached a new yearly high, with XAU/USD surpassing $2,000 for only the third time in recorded history; the last time was during the COVID era.

 

Gold prices have not retreated since the March low of around $1,800, when a strong bull run began. Gold prices have a strong inverse correlation with yields on US Treasury (UST) bonds, which declined significantly in March.

 

The global banking turmoil has compelled investors to reevaluate their outlook on the rising cost of financing. As a result of this uncertainty, investors sought refuge in US Treasury bonds, causing yields to decline.

 

Some speculations imply that the pinnacle in US Treasury yields may have been reached. Gold's function as a safe sanctuary in times of adversity and the decline in U.S. Treasury yields could be behind this exponential price increase.

 

Despite gold prices lingering around $2,000, it is premature to declare a peak. According to the CME FedWatch tool, the markets are pricing in a 26.2% chance that the Fed will leave interest rates unchanged at the conclusion of its March 21-22 meeting, and a 75% chance of a 25 basis point (bps) increase.

 

It is extremely unlikely that the Fed will abruptly end the present rate-hiking cycle. However, it should not be forgotten that the Fed has previously made mid-cycle adjustments. Given that most central banks are nearing the zenith of their rate hike cycles, it is not inconceivable that the Federal Reserve could signal the end of the cycle.

 

Inflation, however, remains above the Fed's objective of 2%, so it would be imprudent for the Fed to halt or end the raising cycle.

 

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