Gold price prepares for more upside on Fed's dovish stance

  • Gold price is aiming to deliver more gains as the Fed surprisingly turns dovish.
  • The Fed is expected to achieve a ‘soft landing’ amid stable labor market projections.
  • Gold investors ignored upbeat US Retail Sales data.

Gold price (XAU/USD) remains steady despite the United States Census Bureau has reported upbeat monthly Retail Sales data for November. US Consumer spending surprisingly grew by 0.3% while market participants projected a contraction of 0.1. In October, the economic data was contracted by 0.2%. Consumers spent heavily on automobiles, which fueled overall retail sales. The economic data seems insufficient to impact broader strength in the Gold price as dovish guidance from the Federal Reserve (Fed) has turned its fundamentals supportive, potentially for the long term. 

The precious metal is expected to add more gains as new projections from the Fed endorse more rate cuts than previously estimated, due to significant progress in inflation declining towards 2%, a stable job market, and reduced inflation projections.

Despite rate cut projections and lower inflation guidance, Fed Chair Jerome Powell didn’t announce victory over inflation. However, a ‘soft landing’ by the Fed is widely anticipated as it is expected to achieve price stability without impacting the labor market and triggering a recession. 

Daily Digest Market Movers: Gold price ignores upbeat US data, US Dollar tumbles

  • Gold price remains almost unchanged after upbeat Retail Sales data as the broader appeal remains strong.
  • US Retail Sales turned out upbeat due to higher sales at food service stations and bars while receipts at gasoline stations fell significantly.
  • The broader appeal for the Gold price is bullish as Fed Chair Jerome Powell surprisingly delivered a dovish guidance on Wednesday.
  • Jerome Powell discussed cutting interest rates in 2024 after keeping interest rates unchanged in the range of 5.25-5.50% consecutively for the third monetary policy.
  • The decision to hold interest rates steady was widely anticipated. It was the mention of lowering borrowing costs in 2024, while announcing new economic projections that fueled demand for risk-sensitive assets and bullions.
  • Powell’s commentary indicated that the rate-tightening campaign by the Fed has come to an end amid progress in inflation declining towards 2%.
  • As per the Fed’s new Summary of Economic Projections (SEP), the core Personal Consumption Expenditure (PCE), which strips out Oil and food prices, and is considered a better gauge for underlying inflation, is seen easing to 3.2% by the end of 2023 from the prior estimate of 3.7%.
  • For 2024 and 2025, the core PCE is seen easing to 2.4% and 2.2% from former projections of 2.6% and 2.3%.
  • For interest rate projections, the Fed sees borrowing rates lowering to 4.6% in 2024 through three rate cuts against prior forecasts of 5.1% and two rate cuts. For the year 2025, interest rates are seen declining to 3.6% against the 3.9% projected earlier.
  • Fed’s outlook for the Unemployment Rate remained unchanged at 4.1% for 2024 and 2025.
  • Despite announcing more rate cuts in coming years, Powell refrained from declaring complete victory over inflation. He said, “It would be premature, and we can't be guaranteed in this progress."
  • Meanwhile, a sustained decline in inflation in the US economy along with an unchanged outlook for the labor market indicates that the Fed will manage to achieve a ‘soft landing’.
  • The US Dollar Index (DXY) dropped to near a five-month low of around 102.15 after the sudden dovish stance shift by the Fed.
  • Meanwhile, 10-year US Treasury yields fell sharply below 4% due to improved risk-taking capacity of the market participants.
  • On Friday, preliminary S&P Global PMI data will keep investors busy. As per the consensus, the Manufacturing PMI is seen slightly down to 49.3 against the prior release of 49.4. The Services PMI is expected to fall by 20 basis points (bps) to 50.6 but will remain above the 50.0 threshold.

Technical Analysis: Gold price trades sideways near $2,040

Gold price trades near a weekly high around $2,040 after recovering from the 50-day Exponential Moving Average (EMA). The precious metal is expected to extend recovery to near the crucial resistance of $2,050. Major resistances for the Gold price are $2,100 and $2,150 respectively.

The Relative Strength Index (RSI) (14) has rebounded to near 60.00. If the RSI (14) manages to climb above 60.00, Gold bulls will strengthen further.

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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