Gold price declines on Fed Powell hawkish remarks, US inflation in focus

  • Gold price falls on easing geopolitical tensions and hawkish remarks from Fed Powell on interest rates.
  • US core inflation is seen growing at a steady pace.
  • A slowdown in the progress of taming inflation could elevate hawkish Fed bets.

Gold price (XAU/USD) has fallen to around $1,940 and it is exposed to more downside amid multiple headwinds. The precious metal loses shine due to no significant escalation in Middle East tensions, hawkish messages from Federal Reserve (Fed) Chair Jerome Powell and his colleagues, and uncertainty ahead of the US Consumer Price Index (CPI) data for October, which will be published on Tuesday.

The appeal for Gold diminished significantly after Jerome Powell said he was less confident that the current interest rate policy was sufficiently restrictive to get inflation under control. Further action in the US Dollar, bond markets and the Gold price will be guided by US inflation data, which will dictate whether more interest rate hikes are needed.

Daily Digest Market Movers: Gold price sets for a breakdown ahead of US CPI data

  • Gold price trades inside Friday’s range as investors swing towards the US inflation data for October, which will be released on Tuesday.
  • The US consumer inflation is expected to provide cues about the monetary policy action by the Federal Reserve in its last meeting of 2023 in December.
  • For October’s inflation data, the headline inflation is seen growing 0.1% on a monthly basis against 0.4% growth in September. The monthly and annual core CPI data expanded at a steady pace of 0.3% and 4.1%, respectively.
  • Persistent inflation data may deepen expectations of one more rate hike from the Fed in December, which would raise interest rates to 5.50%-5.75%. Still, markets broadly expect the Fed to keep rates unchanged.
  • Last week, Fed Chair Jerome Powell and his colleagues conveyed that their job towards taming inflation is not over yet. Powell is not confident that current interest rates are adequate to tame price pressures. 
  • Jerome Powell warned that a failure in getting inflation under control would be the biggest mistake of the central bank. He further said that the central bank will not hesitate to raise interest rates further if needed to ensure the progress in inflation easing towards 2%.
  • St. Louis Fed interim President Kathleen O’Neill Paese supported hawkish remarks from Jerome Powell, and said "It would be unwise to suggest that further rate hikes are off the table". Paese emphasized the need to wait for additional economic and inflation figures before contemplating an interest rate increase.
  • While San Francisco Fed Bank President Mary Daly and Richmond Fed Bank President Thomas Barkin remained unsure about raising interest rates. Daly commented that it would be too early to declare victory over inflation and echoed the need to raise interest rates further.
  • Part of the reason why Fed policymakers are not actively supporting more interest rate hikes is the higher US long-term bond yields, which have significantly contributed in tightening financial conditions further.
  • While Fed policymakers lean towards raising interest rates further, investors still see no rate hike in December.
  • As per the CME Group Fedwatch tool, traders see a 15% chance of the Fed raising interest rates by 25 basis points (bps) at the December meeting.
  • Meanwhile, no significant escalation in the Israel-Palestine war has diminished the appeal for Gold significantly. Israeli Prime Minister Benjamin Netanyahu continues to reject any ceasefire proposal as Hamas denies releasing all hostages.
  • The US Dollar Index (DXY) continues to face pressure near 106.00 as investors hope that the Fed could start the rate-cutting cycle in mid-2024.
  • Economists at Morgan Stanley projected that the Fed will initiate easing monetary policy from June 2024. These cuts are expected to come in 25 bps declines, eventually bringing the policy rate down to 2.375% by the end of 2025.

Technical Analysis: Gold price declines toward $1,930 

Gold price struggles for a direction ahead of the US consumer inflation data for October. The near-term demand for the precious metal remains downbeat due to multiple headwinds. 

On a daily time frame, the correction in Gold price has extended to near the 50-day Exponential Moving Average (EMA), which trades around $1,940.00. Next support for the yellow metal is seen near the 200-day EMA, which hovers near $1,915.00.

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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