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Gold price aims to recovery further as yields drop ahead of Fed policy

  • Gold price jumps further on deepening Middle East tensions.
  • Investors brace for Fed policy decision and US labor and Manufacturing PMI data.
  • Fed’s outlook on interest rates will be in focus.

Gold price (XAU/USD) continues to advance amid the escalating Middle East crisis as US President Joe Biden has pledged to retaliate for unmanned aerial drone attacks on US service personnel near northeastern Jordan, near the Syrian border. Still, the precious metal could turn sideways as investors await the interest rate decision by the Federal Reserve (Fed), which will be announced on Wednesday.

Traders see the Fed holding interest rates in the range of 5.25%-5.50% amid consistently easing price pressures. Investors will focus on the timing at which Fed policymakers are comfortable for commencing the rate-cut campaign. The Fed is not confident yet that underlying inflation will sustainably return to 2% due to strong labor demand, robust Retail Sales, and a broadly upbeat economic outlook.

This week, investors will remain busy as various economic indicators from the US are lined-up for release. The ADP Employment Change will be released on Wednesday, just before the Fed’s policy announcement. These will be followed by the Institute for Supply Management (ISM) Manufacturing PMI on Thursday and Nonfarm Payrolls (NFP) data on Friday.

Daily digest market movers: Gold price strengthens while US yields edge down

  • Gold price refreshes weekly high near $2,040 due to deepening Middle East tensions.
  • US President Joe Biden vowed to retaliate for attacking their forces near northeastern Jordan while Iran denies claims of their involvement in these aerial drone attacks.
  • Escalating geopolitical tensions have significantly improved the appeal for safe-haven assets, while risk-perceived assets have been hit hard.
  • Meanwhile, forward action on the Gold price will be guided by the Federal Reserve’s monetary policy decision, which will be announced on Wednesday.
  • The Fed is expected to hold interest rates steady in the range of 5.25%-5.50% for the fourth straight time as price pressures are consistently declining. However, Fed policymakers are still not convinced that inflation will return to the 2% target in a sustainable manner.
  • Fed policymakers have been reiterating that interest rates should remain in a restrictive trajectory for some time until price stability is ensured. They warned that premature rate cuts could uplift overall demand, which could lead to a rebound in price pressures.
  • Market participants will focus on the interest rate outlook to be provided by Fed policymakers after the announcement of the monetary policy.
  • It will be interesting to watch whether the Fed refers to March or May monetary policy meetings for starting the rate-cut process.
  • The appeal for Gold would strengthen if the Fed turns dovish for the March policy meeting.
  • Apart from the Fed’s policy, US economic data such as ADP Employment Change, ISM Manufacturing PMI, and official employment data for January will be keenly watched.
  • But first of all, investors will react to the US JOLTS Job Openings data for December, which will be published at 15:00 GMT. According to the consensus, job openings are expected to come in at 8.75 million, slightly lower from the 8.79 million recorded for November.

Technical Analysis: Gold price climbs to near $2,040

Gold price rises to near $2,040, supported by geopolitical tensions. The precious metal has strengthened after delivering a breakout of the Symmetrical Triangle chart pattern formed on a daily time frame. A breakout of the aforementioned chart pattern indicates a volatility expansion, which results in wider ticks and heavy volume. The near-term appeal has turned bullish as price is sustaining strongly above the 20-day Exponential Moving Average (EMA). 

However, the 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 area, which indicates that momentum is weak.

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.

Author

Sagar Dua

Sagar Dua

FXStreet

Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.

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