Gold price slumps while US Dollar recovers as Fed maintains hawkish rhetoric
- Gold price faces pressure as no Fed policymakers provide a significant timeline for rate cuts.
- Fed Collins sees rate cuts later this year only if price pressures remain consistent with forecasts.
- The US Dollar recovers strongly on lower weekly Initial Jobless Claims data.
Gold price (XAU/USD) falls sharply in the late European session on Thursday as uncertainty over the timing of interest rate cuts by the Federal Reserve (Fed) deepens. In the monetary policy speeches this week, none of the Fed policymakers have provided any concrete timeline for rate cuts.
The opportunity cost of holding Gold, a non-yielding asset, rises when the Fed holds interest rates high for an extended period. Fed policymakers are considering rate cuts at this stage as “premature.” The Fed needs more good inflation data to gain confidence that price pressures will sustainably return to the 2% target. Also, inflation pressures could flare up again if the Fed goes aggressively for rate cuts. In the early American session, Richmond Federal Reserve Bank President Thomas Barkin advised to be patient for rate changes. Barkin added that he needs to see good inflation numbers being sustained and broadening for rate cuts.
Meanwhile, lower Initial Jobless Claims (IJC) for the week ending February 2 have prompted a recovery in the US Dollar. The US Department of Labor has reported individuals claiming jobless benefits for the first time were at 218K, lower than expectations of 220K and the former release of 228K. Broadly, the United States economic calendar has little to offer this week.
The market sentiment has turned downbeat as Israel’s Prime Minister Benjamin Netanyahu has rejected the ceasefire proposal. The Israeli leader said the complete destruction of Hamas is a few months away.
Next week, the US inflation data for January will be the key trigger that will provide a fresh outlook on interest rates. The Gold price could face more pressure if the inflation data persistently exceeds expectations.
Daily Digest Market Movers: Gold price tumbles while US Dollar advances to reclaim 11-week high
- Gold price slides in the European session on Thursday.
- The broader appeal for the Gold price is uncertain as Federal Reserve policymakers maintain the hawkish rhetoric narrative on interest rates.
- Like other Fed policymakers, Boston Federal Reserve Bank President Susan Collins said on Wednesday that the central bank would be able to lower interest rates only after gaining greater confidence that inflation will sustainably return to the 2% target.
- Susan Collins said the central bank will reduce interest rates at some point later this year if economic data evolves consistently with their goals.
- Minneapolis Federal Reserve Bank President Neel Kashkari said officials are looking for good inflation data for months that could provide confidence of achieving price stability. Kashkari replied that two to three rate cuts seemed appropriate when asked about the number of rate cuts this year.
- The newest member of the Fed’s Monetary Policy Committee (MPC), Adriana Kugler, said in her first policy speech since she was recruited in September that every policy meeting from March could offer rate cuts, given the flow of economic data.
- Contrary to Kugler’s view, Fed Chair Jerome Powell said rate cuts are unlikely in March in its monetary policy statement on January 31.
- While Fed policymakers are holding themselves from offering meaningful cues about the timing of rate cuts, investors have stepped to the sidelines and are awaiting a fresh economic trigger.
Technical Analysis: Gold price falls below $2,030
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Gold price drops gradually from a three-day high of $2,045. The precious metal is broadly sideways, trading in a narrow range of around $2,030. The overlapping structure between the Gold price and the 20-day Exponential Moving Average (EMA) indicates that volatility has squeezed significantly. Also, the gold price forms a Symmetrical Triangle chart pattern on the daily time frame, demonstrating a sharp volatility contraction. The 50-day EMA at $2,023 continues to cushion the Gold price bulls.
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
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.
