Gold Falls Amid Expectations of Upcoming Interest Rate Increase

Gold Declines as Traders Increase Bets on Federal Reserve Monetary Tightening

Gold prices declined as traders increased their bets on Federal Reserve monetary tightening after a warning from Governor Christopher Waller. According to data, bullion slipped as much as 1.1% as bond yields and the dollar climbed. This move comes after Governor Waller stated that he supports making clear the central bank's next interest-rate move is just as likely to be an increase as a cut, as the energy shock from the Iran war pushes up prices.

Federal Reserve Rate Hike Expectations

Traders have now fully priced a quarter-point rate hike by December for the first time. Higher rates typically weigh on gold as it pays no interest. Governor Waller also warned that he wouldn't rule out a future hike if inflation doesn't start to slow soon. His current position is to be patient in holding rates until the war's impact is clearer.

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

US Consumer Sentiment Falls to Record Low

Meanwhile, US consumer sentiment fell in May to a record low and long-term inflation expectations worsened notably due to the Middle East conflict. According to the University of Michigan's final May sentiment index, the data declined to 44.8 this month from 49.8 in April. The data also showed consumers expect prices to rise an annualized 3.9% over the next five to 10 years, up from 3.5% in April and the highest in seven months.

The Bloomberg Dollar Spot Index, a gauge of the US currency, rose 0.1%. Bullion has traded within a fairly narrow range since falling sharply in the early days of the Iran war, as investors weigh higher rates against the prospect of a high-inflation, low-growth scenario. Bullion is down about 15% since the conflict began in late February.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline