- Gold price faces an intense sell-off as Fed Kashkari said he sees one more interest rate hike this year.
- Strength in the US economy due to tight labor market and strong consumer spending have backed the Fed’s hawkish stance.
- The US Dollar refreshes a six-month high near 106.80 amid global slowdown risks and impending government shutdown.
Gold price (XAU/USD) has been dumped heavily by market participants as Federal Reserve (Fed) policymakers reiterate their hawkish stance on the interest rate outlook. The precious metal continues its three-day losing spell as bets for unchanged interest rates fade amid a resilient US economy. The US Dollar attracts significant bids as strong consumer spending and tight labor market conditions may keep excess inflation persistent.
The US labor market conditions seem strengthening further weekly jobless claims remained below consensus. The US Department of Labor reported that individuals claiming jobless claims for the first time increased by 2K to 204K for the week ending September 22 from the previous week’s release but remained lower than expectations of 215K. Meanwhile, the final reading of real Gross Domestic Product (GDP) for the April-June quarter remained in line with the previous estimate and the market expectation of 2.1% on an annualized basis.
In August, demand for Durable Goods remained upbeat as business spending on equipment increased. It seems that optimism among US firms is returning as traders see no more interest rate hikes from the Fed this year. For more clues about the inflation outlook, investors await the Fed’s preferred Core Personal Consumption Expenditure (PCE) Price Index data for August, which is scheduled for Friday.
Daily Digest Market Movers: Gold price sets for a breakdown as US Dollar recovers
- Gold price drops further, printing a fresh six-month low at $1,872.60, as Federal Reserve policymakers continue to support more interest rate hikes ahead.
- Minneapolis Federal Reserve Bank President Neel Kashkari said on Wednesday that he is unsure whether the central bank has hiked enough to bring down core inflation to 2%.
- Kashkari supported one more interest rate hike this year and signaled that the Fed is expected to hold rates steady next year. Kashkari seems cautious that the policy is not restrictive enough due to strong consumer spending coupled with a resilient US economy.
- Robust consumer spending momentum may keep overall demand strong and inflationary pressures intact. This is making the so-called ‘last mile’ of inflation, which needs to be tamed, a hard nut to crack.
- 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 dropped to 77% from 81% earlier. Traders see a 58% chance for interest rates remaining unchanged for the remainder of the year, down from 64% on Wednesday.
- While Gold price is going through a tough phase, the US Dollar and Treasury yields are consistently delivering more gains due to a resilient US economy.
- On Wednesday, the US Durable Goods Orders for August unexpectedly increased. Orders surprisingly rose by 0.2% against expectations of a 0.5% decline. In July, Orders contracted by a sharp 5.6%.
- Business spending on machinery and equipment accelerated as investors expect the Fed is done hiking interest rates. Orders for core goods also rose, indicating persistence in core inflation ahead.
- The US Manufacturing PMI has been contracting for the past 10 months. Still, upbeat order data for equipment has improved the sector’s outlook.
- Apart from the resilient US economy, the US Dollar is capitalizing on global slowdown fears and rising expectations of a government shutdown.
- On Wednesday, Goldman Sachs warned that the likelihood of an impending government shutdown is at 90% and may commence from October 1. The investment banking firm said that another shutdown threat would resurface in the fourth quarter of 2023 even if Congress manages to achieve a temporary funding resolution.
- China’s real-estate sector woes continue, as trading in shares of China Evergrande group was suspended as its chairman is in police custody amid deepening liquidation risks. Apart from that, deflation risks in the world’s second-largest economy are expected to mount further due to the growing jobless rate in the country.
- Going forward, investors will shift focus to the US Core Personal Consumption Expenditure (PCE) Price Index data for August, which will be published on Friday. The Fed’s preferred inflation gauge is seen expanding at a steady pace of 0.2% per month. On an annual basis, inflation is seen decelerating to 3.9% from July’s reading of 4.2%.
Technical Analysis: Gold price seems declining below $1,870
Gold price forms consecutive bearish Marubozu candlesticks on the daily timeframe. This indicates that each pullback in Gold price has been considered as selling opportunities by market participants. The precious metal stabilizes below the 200-day Exponential Moving Average (EMA), which trades around $1,910.00, indicating that the broader trend has turned bearish. Momentum oscillators shifted into the bearish territory, warranting more weakness ahead.
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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