Gold prices decline in response to expectations of sustained higher interest rates.

In Asian trading on Monday, gold prices dropped as speculations grew that the Federal Reserve would maintain higher interest rates for an extended period. However, the yellow metal remained above crucial levels due to some safe-haven demand and short-term weakness in the dollar.

Gold prices experienced substantial profit-taking in January as traders reversed their positions, retracting bets on the Fed and initiating interest rate cuts as early as March 2024. This unwinding reached a climax last week, pushing the yellow metal dangerously close to breaching the $2,000 per ounce threshold.

However, gold received robust support at that threshold, primarily driven by heightened demand for safe-haven assets amid escalating tensions in the Middle East. Additionally, some short-term profit-taking in the dollar, which retreated from a low seen over one month on Monday, contributed to the strength in bullion prices.

However, gold continued to face downward pressure due to the expectation of prolonged higher U.S. interest rates.

Markets reverse March rate-cut bets, now anticipating the Federal Reserve to maintain the current interest rates.

According to the CME Fed watch tool on Monday, traders are currently assigning a higher probability to the Federal Reserve maintaining stable interest rates in March, contrasting with the initial anticipation of a rate cut.

The tool indicated a substantial increase in the likelihood of the Fed maintaining stable rates, reaching 52.9%, a significant surge from the 19% probability observed last week. Additionally, traders are now pricing in a diminished chance of a 25-basis point cut at 46.2%, down significantly from the 76.3% probability noted a week ago.

The change in outlook occurred as several Federal Reserve officials emphasized that it was premature for the central bank to contemplate rate cuts, particularly given the persistent nature of inflation. The consensus is that the central bank is likely to maintain current interest rates in its upcoming meeting next week.

However, preceding that, a series of crucial U.S. economic indicators is expected this week. The fourth-quarter GDP data is scheduled for release on Thursday, followed by the PCE price index data on Friday, which is the Fed’s preferred inflation gauge.

Both data releases are anticipated to significantly influence the Federal Reserve’s decisions on interest rates for the current year. Although gold is projected to eventually gain from potential rate cuts by the Fed, the specific timing and extent of these cuts remain uncertain.