Gold price weakens as uncertainty over interest rate outlook deepens

  • Gold price remains under pressure as the US economy remains resilient despite higher interest rates.
  • The US economy is comfortably absorbing the consequences of the Fed’s higher interest rates.
  • Fed’s Collins says further policy tightening is not off the table.

Gold price (XAU/USD) drops vertically to near $1,915.00 as uncertainty over the interest rate outlook by the Federal Reserve (Fed) deepens. The upside in the precious metal remains restricted as Fed policymakers continue to maintain a hawkish stance for upcoming monetary policy meetings. Chicago Federal Reserve Bank President Austan Goolsbee said "It feels like rates will have to stay higher for longer than markets had expected," 

The US Dollar has also demonstrated a volatility contraction plot, but the broader trend remains bullish due to the resilient US economy. Investors turn cautious about the US economic outlook as the Fed vowed to keep interest rates sufficiently restrictive over the longer term to get inflation under control. This could elevate the Unemployment Rate, slow labor demand, and make factory activities more vulnerable. This week investors will focus on US Durable Goods Orders data and the Fed’s preferred inflation gauge for August.

Daily Digest Market Movers: Gold price tumbles after hawkish tone from Fed's Goolsbee

  • Gold price drops sharply to near $1,915.00 as uncertainty grows over the interest rate outlook by the Federal Reserve.
  • Investors remain baffled about the Fed’s interest rate outlook due to US economic resilience.
  • The US economy has been absorbing the consequences of higher interest rates by the Fed effectively.
  • Market participants hope that the US economy is on a golden path, where inflation recedes without impacting growth. This situation is allowing the Fed to hold interest rates unchanged.
  • Stable labor demand, steady wage growth, and robust consumer spending momentum demonstrate strength in the US economy, while a contracting Manufacturing PMI is still a concern.
  • S&P Global reported on Friday that a preliminary Manufacturing PMI for September improved to 48.9 from expectations of 48.0 and August’s reading of 47.9. Services PMI, which tracks a sector that accounts for two-thirds of the US economy, dropped to 50.2 from the estimates of 50.6 and the 50.5 figure in August.
  • Fed policymakers confirmed that interest rates will remain lofty for a longer period until the achievement of price stability. About the interest rate projections, policymakers see benchmark rates staying above 5% next year and ending 2025 at almost 4%. Fed members expect inflation to be under control in 2026, but interest rates are expected to be well above pre-pandemic levels.
  • As per the CME Fedwatch tool, traders see a 71% chance for interest rates remaining steady at 5.25%-5.50% at the November monetary policy meeting.
  • Boston Fed President Susan Collins remains confident about further policy tightening. Collins said on Friday that a further rate hike is certainly not off the table. She further added that inflation can fall with only a modest rise in unemployment and that core services excluding shelter have not yet shown a sustained improvement.
  • Contrary to this sentiment, Morgan Stanley’s Chief US Economist Ellen Zentner believes that the Fed is done hiking rates. She further added that with inflation cooling, the central bank will likely keep rates on hold until it’s ready to cut next year.
  • The US Dollar Index is consolidating in the 105.30-105.80 range over the last three trading sessions. The broader trend is quite positive amid US economic strength, while other G7 economies are struggling for a stable footing.
  • Meanwhile, US equities are under pressure as investors expect a “higher for longer” context for interest rates would dent overall demand. This may force US firms to trim their growth projections.
  • This week, investors will focus on the Durable Goods Orders for August, which will be published on Wednesday. The economic data is seen contracting at a slower pace of 0.4% vs. July’s contraction of 5.2%.

Technical Analysis: Gold price consolidates above $1,920

The Gold price struggles to find a direction amid uncertainty over the interest rate outlook. While traders bet on interest rates remaining unchanged, the Fed’s Collins delivered a hawkish commentary. On the daily chart, the Gold price forms a Symmetrical Triangle, which demonstrates a volatility squeeze due to the absence of an economic trigger. The 20 and 50-day Exponential Moving Averages (EMAs) continue to restrict upside in the Gold price.

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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