Gold breaks down despite soft US core PCE reading, US Dollar recovers

Gold price attracts bids below $1,860.00 after a mild correction in the US Dollar.
The US economy remains resilient due to falling inflation, stable labor demand, and robust consumer spending.
Fed Kashkari said that current interest rates are not sufficiently restrictive to bring down inflation to 2%.

Gold price (XAU/USD) retreats despite the soft United States Personal Consumption Expenditure (PCE) Price Index report for August. The US Bureau of Economic Analysis reported that monthly Core PCE grew at a nominal pace of 0.1%, slower than expectations and the former pace of 0.2%. The annual core PCE data decelerated to 3.9% as expected against July's reading of 4.3%. The headline PCE expanded at a higher pace of 0.4% vs. July's reading of 0.2% but slower than expectations of 0.5%. On an annualized basis, the economic data accelerated nominally to 3.5% as expected due to rising energy prices.

The upward move in the precious metal was short-lived as Federal Reserve (Fed) policymakers look set for one more interest rate increase by the year-end amid a resilient US economy and persistent inflation pressures.

The US economy has been performing well on the grounds of inflation, labor market, and consumer spending but factory activity is still a concern for the authorities amid a poor demand outlook. Investors will keenly focus on the Manufacturing PMI report for September, which will be published on Monday, for further clues about the current health of the factory sector. Markets expect the PMI data to signal that factory activity contracted for the 11th consecutive month.

Daily Digest Market Movers: Gold weakens as investors ignore soft US PCE data

Gold price recovery falters despite a soft US PCE price index report for August while the US Dollar discovers interim support after correcting to near 105.60.
The Core PCE softened more than expectations while headline data accelerated as anticipated due to rising energy prices.
Recently, the odds for Federal Reserve (Fed)'s interest rates remaining steady at 5.25%-5.50% were trimmed as policymakers delivered hawkish remarks and Durable Goods Orders surprisingly expanded in August.
On Wednesday, Minneapolis Federal Reserve Bank President Neel Kashkari said that he is unsure whether the central bank has hiked enough to bring down core inflation to 2%.
Meanwhile, Richmond Fed Bank President Thomas Barkin advocated for a ‘wait and watch’ approach as a probable government shutdown could complicate the Fed’s ability to assess the state of the economy due to the possible interruption of economic data releases.
US Durable Goods Orders for August unexpectedly rose by 0.2% against expectations of a 0.5% decline. In July, Orders contracted by a sharp 5.6%. The US Manufacturing PMI has been contracting for the past 10 months. Still, upbeat order data for equipment has improved the sector’s outlook.
As per the CME Group Fedwatch tool, chances that interest rates will remain steady at 5.25%-5.50% at the November monetary policy meeting have recovered to 83% from 77% on Thursday. Traders see a 66% chance for interest rates remaining unchanged for the remainder of the year, up from 58% on Thursday.
While the recovery in energy prices could have a temporary impact on US inflation, rising house rentals could keep inflation sticky. Fed’s Barkin said on Thursday that housing will be key to tracking the progress towards taming inflation in the next few quarters, with risks that rising home prices could also boost market rents.
The US Dollar Index (DXY) rebounds after correcting to near 105.80 as the US economy appears to be handling higher interest rates effectively while other economies are struggling.
The US economy has been showing a resilient labor market, household demand, and decreasing inflation. Still, its manufacturing sector has been contracting consistently for the past 10 months, according to PMI data.
After US PCE Price Index data, investors will shift their focus to the Manufacturing PMI report for September, to be released by the Institute of Supply Management (ISM) on Monday.
The US Manufacturing PMI is seen improving to 47.8 from August’s reading of 47.6 but will remain below the 50.0 threshold which signals a contraction in activity. This would be the 11th month of contraction in a row.

Technical Analysis: Gold price drops back to $1,860

Gold price finds an interim support after printing a fresh six-month low below $1,860.00. The four-day losing spell in Gold price appears to have halted, but for a sustained recovery the asset has to recapture the crucial resistance at $1,900.00. The broader bias remains bearish as the 20-day and 200-day Exponential Moving Averages (EMAs) have delivered a bear cross. A bounce-back move in the precious metal is also backed by oversold momentum oscillators.

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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