Gold price consolidates near multi-month low, awaits US ISM PMI and Fed Chair Powell’s speech

  • Gold price continues losing ground for the sixth straight day and drops to a near seven-month low.
  • Bets for further policy tightening by the Fed turn out to be a key factor weighing on the “XAU/USD”.
  • The risk-on impulse further contributes to driving flows away from the safe-haven precious metal.

Gold price (XAU/USD) settled deep in the red on Friday to end September down over 4.5% and lower for the second quarter in a row. The yellow metal also recorded its biggest weekly decline in more than two years and continues to be weighed down by growing acceptance that the Federal Reserve (Fed) will keep interest rates higher for longer. The US central bank indicated the possibility of one more rate hike by the year-end, which, in turn, is seen as a key factor driving flows away from the non-yielding commodity.

Gold price did gain some respite on Friday following the release of the Personal Consumption Expenditures (PCE) Price Index from the United States (US), though the uptick ran out of steam rather quickly. The data does little to change the view that the Fed will tighten its monetary policy further. The outlook, meanwhile, triggers a fresh leg up in the US Treasury bond yields on Monday, which continues to act as a tailwind for the US Dollar (USD) and drags the non-yielding yellow metal lower for the sixth successive day.

Apart from hawkish Fed expectations, the risk-on impulse is seen as another factor undermining demand for the safe-haven Gold price. Slightly better-than-expected official Chinese PMIs and the passage of a stopgap US government funding bill over the weekend boost investors' appetite for riskier assets. That said, the oversold Relative Strength Index (RSI) on the daily chart, holds back bears from placing fresh bets around the XAU/USD, which, now seems to have entered a consolidation phase around the $1,840 level.

The Gold price, meanwhile, remains in the negative territory for the ninth day in the previous ten and the aforementioned fundamental backdrop suggests that the path of least resistance is to the downside. Hence, any meaningful recovery attempt might still be seen as a selling opportunity and remain capped ahead of important US macro data scheduled at the beginning of a new month. A rather busy week kicks off with the release of the US ISM Manufacturing PMI on Monday, which will be followed by Fed Chair Jerome Powell's speech.

Daily Digest Market Movers: Gold price consolidates its recent heavy losses to a multi-month low

  • Market participants seem convinced that the Fed will stick to its hawkish stance and keep rates higher for longer.
  • The US PCE Price Index rose in line with consensus estimates, to 3.5% over the past twelve months through August.
  • The annual Core PCE Price Index – the Fed's preferred gauge of inflation – decelerated from 4.3% in July to 3.9%.
  • The rise in consumer spending, meanwhile, along with surging gasoline prices, points to higher prices going forward.
  • Hawkish Fed expectations keep the 10-year US Treasury yield elevated near a 16-year top and underpin the US Dollar.
  • The official Chinese PMIs showed that business activity in the manufacturing sector grew for the first time in six months.
  • The US Congress on Sunday approved the stopgap funding bill to avert a government shutdown for another 45 days.
  • Traders now look to the US ISM Manufacturing PMI, expected to come in at 47.9 in September, for a fresh impetus.
  • Investors might refrain from placing fresh directional bets ahead of the closely-watched US NFP report on Friday.

Technical Analysis: Gold price remains vulnerable to slide further

From a technical perspective, the Relative Strength Index (RSI) on the daily chart is already flashing oversold conditions and warrants some caution for bearish traders. Hence, it will be prudent to wait for some near-term consolidation or a modest bounce before positioning for an extension of the ongoing downward trajectory. The Gold price, meanwhile, seems poised to test the next relevant support near the $1,820 level before eventually dropping to the $1,800 mark. On the flip side, the $1,850 level is likely to act as an immediate barrier, which if cleared might trigger a short-covering move. The subsequent move up, however, might still be seen as a selling opportunity and cap the XAU/USD near the $1,863-1,864 resistance zone.

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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