Gold price rallies on weak US private employment data, Fed policy eyed
|- Gold price rises swiftly ahead of Fed’s monetary policy announcement.
- The Fed is expected to deliver a steady interest rate decision while the future outlook on rates will be the main focus.
- US ADP showed private payrolls at 107K against projections of 145K.
Gold price (XAU/USD) strengthens as the United States Automatic Data Processing (ADP) has reported a weaker demand for labor that what anticipated by the market participants. US private employers recruited 107K job-seekers in January, which were significantly lower than expectations of 145K and the prior reading of 158K. A slowdown in the labor demand is expected to scale up expectations for early rate-cuts by the Federal Reserve (Fed).
Market volatility is expected to remain escalated as investors await the monetary policy decision by the Fed. The Fed is expected to deliver a steady interest rate decision for the fourth time in a row. Investors will keenly focus on the bank’s guidance – future expectation – for interest rates, and that will probably direct action in the FX domain.
Amid easing price pressures, further quantitative tightening is not expected from the Fed, therefore, market participants will focus on “when and at what pace” the central bank will start reducing interest rates. Investors are anticipating that the Fed will commence the rate-reduction process from May.
Previous Fed meeting guidance was for 75 basis points (bps) of cuts in interest rates in 2024. The market has been focusing on expectations for early cuts, however, comments from individual policymakers have been advising for keeping interest rates elevated at least for the first-half of the year – until they become confident that the underlying inflation rate will return to the Fed’s 2% target in a timely manner.
Daily Digest Market Movers: Gold price remains upbeat ahead of Fed meeting
- Gold price rises vertically to $2,050 as US Dollar Index falls vertically after downbeat private employment data.
- Investors await the Federal Reserve’s monetary policy and will look for the impact of weak labor market data on the ineterst rate outlook.
- As per the CME Fedwatch tool, traders are confident about the Fed keeping interest rates unchanged in the range of 5.25-5.50% at the meeting.
- This would be the fourth straight time the Fed has left interest rates steady.
- Price pressures in the United States economy are consistently declining, which have been refraining Fed policymakers from hiking interest rates further.
- Fresh commentary from Fed policymakers on the outlook of interest rates is of utmost importance as a steady monetary policy decision is largely expected.
- In the last monetary policy meeting, Fed Chair Jerome Powell as well as the Summary of Economic Projections (SEP), which contains the expectations of all members, guided a reduction in interest rates by 75-basis points (bps) in 2024, which boosted demand for risk-perceived assets significantly.
- Guidance for 75 bps rate cuts also led to expectations for Fed commencing rate-cuts from March but then failed to gather momentum due to resilient US economic data.
- Investors will be interested to see how the Fed will adjust its three rate-cut guidance in coming policy meetings.
- The CME Fedwatch tool indicates that the Fed will probably start the rate-cut campaign from May now (instead of March). Absence of dovish signals for May’s meeting would build pressure on the Gold price and will improve appeal for the US Dollar.
- This week, various US economic indicators are lined-up, which will keep investors busy. The ISM agency will release the Manufacturing PMI on Thursday, which will be followed by official Employment data, which will be released on Friday.
- On the global front, geopolitical tensions continue to provide a cushion to bullion. US President Joe Biden vowed to retaliate for aerial drone attacks on US bases near northeastern Jordan.
Technical Analysis: Gold holds climbs to near $2,050
Gold price jumps to near the crucial resisatnce of $2,050 as US Dollar falls sharply after US ADP reported a slower labor demand in January. The outlook for Gold price is bullish ahead of the Fed policy decision. The precious metal is forming a Symmetrical Triangle chart pattern on the daily chart. This suggests a probable eventual breakout in the direction of dominant uptrend, although this type of triangle can break in any direction.
Momentum is still weak as the 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range.
Fed FAQs
What does the Federal Reserve do, how does it impact the US Dollar?
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
How often does the Fed hold monetary policy meetings?
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
What is Quantitative Easing (QE) and how does it impact USD?
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
What is Quantitative Tightening (QT) and how does it impact the US Dollar?
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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