Gold price trades sideways as Fed pushes back rate cut hopes
|- Gold price consolidates after a two-day sell-off amid a light economic calendar.
- The US Dollar falls slightly, but its broader appeal is bullish amid a robust performance of the US economy.
- A strong order book for US manufacturing and service sectors has set a positive undertone for 2024.
Gold price (XAU/USD) struggles to find a direction in Tuesday’s European session amid a lack of data drivers as the economic calendar in the United States is light this week. The two-day sell-off in the precious metal has paused for a while as various Federal Reserve (Fed) are lined up to provide their outlook on interest rates. The rally in the US Dollar Index (DXY) has paused, but more upside is likely as Fed policymakers consistently deny the need for early rate cuts.
The chances of aggressive rate cuts by the Fed have sharply diminished as the US economy is outperforming. Fed policymakers have warned that an early rate-cut decision could support demand and boost the economy, which would slow the progress of inflation declining towards the 2% target.
Daily digest market movers: Gold price consolidates as Fed speakers line up
- Gold price finds selling pressure while attempting to extend recovery above the crucial resistance of $2,030.
- The precious metal has fallen as Federal Reserve officials push back expectations of aggressive rate cuts due to resilient domestic growth and a stubborn inflation outlook.
- The CME Fedwatch tool shows that a rate cut in March is unlikely. For May’s policy meeting, bets favoring an interest rate reduction by 25 basis points (bps) have come down to 55%.
- On Monday, Minneapolis Federal Reserve Bank President Neel Kashkari said the lower risk to US economic woes had bought time for the central bank to reconsider rate cuts.
- Increasing employment levels and robust economic prospects consistently improve hopes of a “soft landing” for the Fed.
- After robust labor market and Manufacturing PMI data for January, the Services PMI also outperformed expectations. The Services PMI represents the service sector, which accounts for two-thirds of the US economy, rose to 53.4 against expectations of 52.0 and the prior reading of 50.5.
- The sub-index gauging new orders for service enterprises rose to 55.0 against expectations of 52.8, indicating a strong order book for 2024.
- On the geopolitical front, hopes for a ceasefire between Israel and Palestine in Gaza could exert more pressure on the Gold price.
- The US Secretary of State Antony Blinken and Saudi's crown prince discussed "regional coordination" on ending the war in Gaza and plans for the strip after the fighting ends, CNN reported.
Technical Analysis: Gold price juggles around $2,025
The Gold price oscillates in a tight range around $2,025 on Tuesday. The precious metal remains inside Monday’s trading range, which indicates that investors await a fresh economic trigger for further guidance. The 50-day Exponential Moving Average (EMA) at $2,021 continues to provide support. On a broader note, the Gold price is expected to remain well-supported above the psychological cushion of $2,000. Meanwhile, the 14-period Relative Strength Index (RSI) indicates a lackluster performance ahead, oscillating in the 40.00-60.00 range.
Inflation FAQs
What is inflation?
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
What is the Consumer Price Index (CPI)?
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
What is the impact of inflation on foreign exchange?
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
How does inflation influence the price of Gold?
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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