The Federal Reserve, as widely anticipated, cut interest rates by 25 basis points on Wednesday (December 18th), bringing the total reduction in the federal funds rate to 100 basis points this year, following previous cuts in September and November.
However, in the subsequent press conference, Chairman Jerome Powell signalled a more cautious approach to monetary easing next year. Investors currently predict at most two more rate cuts in 2025.
Following the Fed’s hawkish stance, the dollar and US Treasury yields surged. Spot gold prices fell 0.9% to $2,622.44 per ounce before closing, marking a three-week low, while Nymex gold futures dropped over 1.0% to $2,633.80 per ounce.
After rate cut announcement, the three major US stock indexes all plunged, turning from gains to losses, with declines widening during Powell’s speech. By the close, the Dow Jones, S&P 500, and Nasdaq fell 2.58%, 2.95%, and 3.56%, respectively. The Dow experienced its longest losing streak in 10 trading days since 1974.
Market participants viewed the rate cut as widely expected, but the Fed appeared to be signaling a policy reversal. CME’s FedWatch tool shows only a 19% probability of a Fed rate cut in January.
Ole Hansen, Head of Commodity Strategy at Saxo Bank, noted in his latest report that Trump’s aggressive plans regarding tariffs, tax cuts, and deportations highlight the risk of unexpectedly higher inflation and debt – two factors driving gold investors to seek protection.
Meanwhile, precious metals should also benefit from further central bank buying, evidenced by recent gold purchases by the People’s Bank of China.
Christian Borjon Valencia, analyst at FXStreet, pointed out that technically, if gold falls further, the next support level would be the November 14th low of $2,536 per ounce. A breach below this level would challenge the August 20th high of $2,531. To resume an upward trend, gold needs to break above $2,650, then the 50-day moving average of $2,670, next the important psychological level of $2,700.
Traders are also watching US GDP and inflation data to be released later this week, which could further influence expectations for monetary policy. With the Christmas holiday next week, gold’s significant gains this year might entice some traders to take profits before the end of the year. We will have to wait and see!
