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Gold price stuck at daily lows as markets fear higher peak in rates

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(Kitco News) The gold market dropped 2% on the day as investors were spooked by the hawkish testimony from Federal Reserve Chair Jerome Powell, which revealed a higher rate peak than previously thought.

Aside from rates rising higher than expected, Powell also pointed to the possibility of quicker increases, hinting that the Fed could revert back to 50-basis-point hikes after slowing to 25 bps in February.

"The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated," Powell told the Senate Banking Committee. "If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes."

Analysts interpreted Powell's comments as very hawkish but noted that this kind of tone was largely anticipated.

"While some market participants might have been caught off guard by Powell's comments, the reality is that he is largely affirming what the bond market has already priced in," said Charlie Ripley, senior investment strategist at Allianz Investment Management. "The terminal level for policy rates will be slightly higher than previous expectations as the timing of an economic slowdown has been pushed further down the road."

The idea that the Fed could employ a 50-basis-point hike in March is what's weighing on gold. And following Powell's testimony, markets started to price in a 66% chance of a 50-bps hike at the March meeting, according to the CME FedWatch Tool.

"Another upside surprise from inflation in next week's release would likely be enough to push the Fed back to a half percentage point hike later this month," said Bill Adams, chief economist at Comerica Bank. "Financial markets are pricing in roughly 50-50 odds that the Fed raises its target rate to over 5.5% by the second half of this year."

With the Fed maintaining such an aggressive policy stance, some economists are looking for a hard landing later this year, stating that monetary policy works with the lag.

"We are yet to fully feel the effects of the most aggressive period for monetary policy tightening for over forty years. It isn't just the increase in borrowing costs that is the issue, but also the availability of credit, with the Federal Reserve's own Senior Loan Officer Survey highlighting how rapidly banks are pulling back from lending," said James Knightley, chief international economist at ING. "So we have an intensifying issue regarding both the cost and access to borrowing, which runs the risk of a harder landing for the economy than markets are currently discounting."

All eyes on employment data due Friday

With Powell's testimony being priced in, markets will be shifting their attention to the U.S. February employment data, with the non-farm payrolls scheduled to be released Friday.

Market consensus calls are projecting 203,000 new positions added in February and the unemployment rate at 3.4%.

"A hawkish-sounding Powell coupled with another strong jobs report could spell nothing but trouble for gold," said Lukman Otunuga, senior research analyst at FXTM.

Otunuga warned that sustained weakness could open the door to a re-test of $1,800 an ounce.

April Comex gold futures were last at $1,819.40 an ounce, down 1.90% on the day.

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