XAU/USD: If the US Fed Increases Interest Rate in June
Investors’ risk aversion, amid the decline in prices of oil since the end of March and uncertainty of economic situation in the world, has triggered the rise in demand of the Yen and gold.
Since the beginning of this week, the price of gold has grown by 15 USD per ounce. At the beginning of today’s European session the price has reached the level of 1235.00, however during the session the pair XAU/USD is declining.
The decline in the price of gold was caused be yesterday’s speech by the head of the US Fed Janet Yellen, who gave positive assessment of the US economy and confirmed that the US Fed plans to increase interest rates; however Fed prefers gradual path for rate hikes
This morning Kansas city Fed president Mrs. George said that since the state of the labor market and other US macro-economic are positive, delays in the increase of the interest rate may cause the formation of the “bubbles”.
On Monday, Boston Fed president Eric Rosengren said federal funds rate futures fell significantly, reflecting expectations for only a very gradual increase in short-term interest rates. Futures markets assign a very high probability of one or zero increases in rates by the end of this year. Therefore it will be reasonable to increase interest rates earlier than it is expected in the futures markets.
Most of the market participants believe that the US Fed can increase interest rates in June.
Therefore, the price of gold will be under pressure prior to this event, provided there will not be any unforeseen negative developments in the political stage or financial market.
Low interest rates are preferable for gold, as gold does not bring high profit and dividends. In the situation when interest rates are high gold loses its attractiveness and begin to decline against the USD, as the cost of borrowing for the purchase of gold and its storage is increasing.