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Gold price rises as Fed sets to keep monetary policy unchanged

  • Gold price extends winning spell as investors see the Fed keeping interest rates on hold.
  • The Fed is expected to announce an unchanged interest rate decision amid falling inflation and upbeat economic prospects.
  • Worries about an economic slowdown due to “higher interest rates for longer” linger despite the US economic resilience.

Gold price (XAU/USD) continues to attract bids ahead of the Federal Reserve (Fed) interest rate decision, which will be announced on Wednesday. The yellow metal extended its three-day winning spell on Tuesday as the Fed is expected to maintain the status quo on the grounds of falling inflation and an upbeat economic outlook.

Investors remain curious about the guidance on interest rates as a hawkish outlook would trigger a risk-aversion theme. Markets are pricing in that the Fed is done with hiking rates until year-end, and hopes for the US economy shifting on a “golden path” are high. The only factor that could keep expectations of one more interest rate increase is rising energy prices, which may contribute to inflation and further squeeze households’ real incomes.

Daily Digest Market Movers: Gold price struggles to extend recovery

  • Gold price extends its upside momentum above $1,930 as investors see the Federal Reserve keeping interest rates unchanged at 5.25%-5.50%  after its September monetary policy meeting. The decision will be announced on Wednesday.
  • The precious metal kept attracting bids from the past three trading sessions as the upside in the US Dollar is expected to remain restricted on expectations of unchanged rates.
  • US inflation is falling and the labor market is resilient despite higher interest rates, allowing policymakers to leave interest rates unchanged.
  • The recent rise in Oil prices is exerting pressure on inflation but Fed policymakers generally consider core inflation, which doesn’t include energy prices, while framing monetary policy.
  • For the interest rate guidance, the Fed is expected to keep the doors open for further policy tightening to ensure price stability.
  • The Fed could keep interest rates elevated long enough to bring down inflation to 2%. This is likely to continue to build pressure on the US economy, particularly for the manufacturing and housing sectors.
  • Any discussion about rate cuts would improve the appeal for the risk-perceived assets and dampen the US Dollar. Economists at Goldman Sachs expect Fed officials to signal a full percentage point of cuts next year but to keep expectations of one more interest rate increase this year to a range of 5.50%-5.75%.
  • Worries about an economic slowdown due to higher interest rates for longer linger despite the current economic resilience. Shorter-term US Treasury yields have surpassed the yields offered in longer time frames, a situation that has historically indicated risks of a potential recession.
  • As per the CME Group Fedwatch Tool, traders undoubtedly see interest rates remaining steady at 5.25%-5.50% after the Federal Open Market Committee (FOMC) meeting on Wednesday. For the rest of the year, traders anticipate almost a 58% chance for the Fed to also keep monetary policy unchanged.
  • About the US economic outlook, US Treasury Secretary Janet Yellen on Monday said that she doesn’t see any signs that the economy will enter into a downturn as inflation is coming down and the labor market is quite strong.
  • However, Yellen warned that a failure by Congress to pass the legislation to keep the government in control could elevate the risk of an economic slowdown.
  • Later this week, investors will watch the preliminary Manufacturing and Services PMI September data to be reported by S&P Global. US factory activity has remained vulnerable due to higher interest rates. Firms are focusing on achieving efficiency by controlling costs in a deteriorating demand environment.
  • The US Dollar Index (DXY) seems well-supported above the crucial 105.00 level. Investors keep pumping money into the USD Index due to deepening fears of a global slowdown in a high-interest rate environment.

Technical Analysis: Gold price stabilizes above 200-EMA

Gold price resumes its three-day winning spell as the Fed is expected to keep the monetary policy unchanged on Wednesday. The precious metal is at a two-week high at around $1,935.00 after discovering buying interest near the 200-day Exponential Moving Average (EMA), which trades at around $1,910.00. The yellow metal has climbed above the 20-day and 50-day EMAs, which indicates that the short-term trend has turned bullish.

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.

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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