Commodity prices tumbled Tuesday while a key US dollar gauge jumped to a two-month high as Federal Reserve Chairman Jerome Powell warned that a “bumpy” trajectory for inflation would likely mean interest rates will need to go higher than previously anticipated.
“The Fed boss now thinks that they will have to go further and faster on rate rises, potentially moving away from the sedate 25 basis points pace of the last meeting,” Chris Beauchamp, chief market analyst at IG, an online trading platform, wrote Tuesday.
The US Dollar Index jumped 1% to 105.53, the highest level since January 6, as Powell’s testimony to the Senate Banking Committee strengthened prospects of the US benchmark interest rate climbing even more than investors had anticipated. The rate now stands at 4.5%-4.75%.
In turn, oil and other dollar-denominated assets, such as gold, were hurt. West Texas Intermediate crude, the US benchmark, fell as much as 3.3% to $77.79 a barrel and largely held around that price. Brent crude oil, the international benchmark, slumped 3.2% to $83.40.
Powell “sounded more hawkish than some had envisaged. Fears over a potential hard landing were revived given the monetary policy transmission lag,” Fawad Razaqzada, market analyst at Forex.com, wrote Tuesday.
Precious and base metals slumped, with silver down 4.7% to $20.07 per ounce and copper off by 2.8% at $3.39 per pound.
“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 said in his first day of testimony on Capitol Hill. He will return to address House lawmakers on Wednesday.
Gold was down 1.9% at $1,819.20 an ounce as the precious metal seen as an inflation hedge competed with assets that offer yield such as US Treasury debt. The 2-year Treasury yield, which is sensitive to Fed-rate expectations, leapt to 5% for the first time since 2007.
“Although inflation has been moderating in recent months, the process of getting inflation back to 2% has a long way to go, and is likely to be bumpy,” Powell said.
Gold trading around $1,835 per ounce indicates a bearish short-term bias, said Razaqzada.
“Even if gold were to find unexpected support in the next few days, it still faces a few other big levels ahead – for example at $1,900,” he said. “So, the bulls have a lot of wood to chop before we turn positive on the technical outlook of the metal again. For now, the path of least resistance is still to the downside.”