Gold price falls back due to significant upside risks to inflation
|- Gold price refreshes five-month low under $1,900 as US Dollar strengthens.
- Resilience in the United States economy will keep inflationary pressures stubborn.
- Atlanta Fed’s GDPNow forecast model predicts annualized Q3 growth rate of 5.8%.
Gold price (XAU/USD) picks some support after remaining in the bearish territory as the US Dollar corrects. Earlier, the precious metal senses the pain of rising inflation expectations due to robust consumer spending momentum. Federal Reserve (Fed) policymakers noted that while the pace of fresh payroll additions is slow, the Unemployment Rate continues to remain near historic lows and strong wage growth will keep inflation persistent.
In spite of higher borrowing costs and tight credit conditions by United States commercial banks, housing demand, and construction activities expand, and retail demand remains upbeat, which will keep Fed policymakers on their toes. Severe strength in the US Dollar is also backed by declining Gross Domestic Product (GDP) projections for China due to poor demand from households and a vulnerable housing sector.
Daily Digest Market Movers: Gold price fails to maintain recovery
- Gold price finds nominal bets after printing a fresh five-month low around $1,890.00 as Federal Reserve minutes for the July meeting released on Wednesday conveyed that the central bank could raise interest rates further.
- The precious metal faces severe selling pressure amid strength in the US Dollar and higher Treasury yields. The reasoning behind the strength in the Greenback and bond yields is rising upside risks to inflation.
- 10-year US Treasury yields rose sharply to near 4.30% as the Fed remains cautious as the “last mile” of inflation seems persistent.
- In addition to stubborn inflation expectations, the US Dollar is enjoying bids as the Chinese economic outlook remains bleak.
- A rising Unemployment Rate, a slowdown in the housing sector, and weak overall demand demonstrate deflation risks in the Chinese economy, which improves the appeal of the US Dollar as a safe haven.
- Fed Minutes from July’s FOMC meeting conveyed that two policymakers favored an unchanged interest rate decision, while others supported one more interest rate hike.
- A majority of Fed policymakers remained worried about upside risks to inflation, which indicates that the job of achieving price stability is not done yet.
- No signs of victory against inflation indicate that the interest rate policy could be tightened ahead.
- Fed policymakers agreed that the level of uncertainty remained high and that future interest rate decisions would depend on the "totality" of data arriving in "coming months".
- Policymakers said that payroll additions have slowed recently, but the Unemployment Rate remains unchanged and is consistent with the objective of bringing core inflation down to 2%.
- The US economy is quite resilient due to robust consumer spending momentum, which might keep inflation elevated.
- US housing data for July released on Wednesday remained upbeat despite higher borrowing costs. Nuclear homebuilding rose by 3.9% against the forecast of 2.7%. In addition, future construction approvals rose nominally against the contraction recorded in June.
- Apart from that, monthly Industrial Production came out of contraction in June and expanded by 1.0% in July vs. estimates of 0.3%.
- Atlanta Fed’s GDPNow forecast model predicted an annualized growth rate of 5.8% for the third quarter vs. 5.0% estimate earlier. Also, Deutsche Bank increased its estimate for Q3 real Gross Domestic Product (GDP) to 3.1% from the former prediction of 1.5%.
- On Thursday, investors will focus on the weekly Jobless benefits data for the week ending August 11. The economic data is seen at 240K, lower than the previous week’s reading of 248K.
Technical Analysis: Gold price slips below $1,900
Gold price delivers a fresh swing low, printing a fresh five-month low at $1,889.60 as upside risks to inflation grow amid resilience in the US economy. The precious metal trades below the 200-day Exponential Moving Average (EMA) for the third straight trading session, suggesting that bears have an upper hand. The deviation between the declining 20 and 50-day EMAs is widening further, indicating that the bearish impulse is strengthening.
Interest rates FAQs
What are interest rates?
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
How do interest rates impact currencies?
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
How do interest rates influence the price of Gold?
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
What is the Fed Funds rate?
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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