Gold lost around $100 in February after rallying just slightly more than that in January. Spot gold opened the month at $1928.26 and last traded at $1828.44 on Tuesday, writes Anna Golubova for Kitco News.
The last time gold lost at least that much was in June 2021, when prices dropped from $1907.42 to $1769.80, falling more than $130 on the month.
Markets went from expecting a rate cut at the end of this year to a high possibility of higher-for-longer rates as macro data surprised on the upside.
"Resilient growth and inflation data have helped the market price out a large chunk of its expectations for Fed cuts this year, in line with the higher-for-longer view, weighing on precious metals," said TD Securities commodity strategist Daniel Ghali.
Inflation is proving challenging to bring down, adding to fears that the Fed will be much more aggressive than previously thought.
"France and Spain are the latest countries to report higher-than-expected inflation and confirm our long-held notion that inflation is proving to be much stickier than expected and that central banks will have to go higher for longer," said BBH Global Currency Strategy's head Win Thin.
"Global monetary conditions will continue to tighten. Any notions of 2023 easing by the major central banks should be put to rest."
France and Spain reported accelerating inflation in January, a record 7.2% and 6.1%, respectively. This comes after the Fed's preferred U.S. inflation measure — the annual core PCE price index — accelerated in January, reaching 4.7% versus the expected 4.3%.
Markets are not ruling out a return to 50-basis-point hikes after the Fed decided to slow down to a 25 bps increase in February. According to the CME FedWatch Tool, there is a 23% chance of a 50 bps rate hike in March.
From a technical perspective, gold is in danger if it falls below $1800 an ounce. But that level has been holding so far on more robust demand for the physical metal.
"Gold prices have found support at the 200-day moving average … but, a return to CTA selling could be in the cards as prices still flirt with a break below the 200dma and key $1,800/oz mark," Ghali noted Tuesday.
Between the $1780-$1800 levels, there was an interesting area of support, said OANDA senior market analyst Craig Erlam.
"There is a lot of technical support around here from the 50 fib — November lows to February highs — to the 200-day simple moving average. It was also previously a major rotation level, and with momentum slipping on approach this time, it could prove to be the case again," Erlam said on Tuesday.
How gold reacts when it hits that range will be a major indication of market sentiment, he added.
The two key drivers needed to stop the selloff are robust physical demand and continued interest in the precious metal from central banks, said Standard Chartered precious metals analyst Suki Cooper.
"The floor for the market will likely be tested, as well as the second two pillars: first China's demand and second and most importantly, official-sector demand," Cooper pointed out.
Gold's next support level is $1,788 an ounce. "We still think most of the upside risk will materialize in H1, with gold facing downside risk in H2-2023," she noted.