Gold price capitalizes on weak US data, Fed policy hogs limelight

  • Gold price managed to recover some losses as the private payrolls failed to meet estimates.
  • The Fed is expected to keep interest rates unchanged but will keep expectations of further policy tightening alive.
  • Middle East tensions keep the broader appeal for Gold bullish.

Gold price (XAU/USD) recovered losses and turned positive on Wednesday after a two-day losing spell on weaker-than-anticipated United States Automatic Data Processing (ADP) and the Institute of Supply Management (ISM) Manufacturing PMI data for October. The US ADP reported that employers hired 113K job seekers, which were lower than expectations of 159K but significantly higher than the former reading of 89K. Meanwhile,  job openings rose significantly in September, as reported by the US Bureau of Labor Statistics (BLS). The agency reported that the number of job openings on the last business day of September stood at 9.55 million against 9.49 million (revised from 9.61 million) openings in August and market expectations of 9.25 million.

The ISM reported the Manufacturing PMI at 46.7, lower than expectations and the former reading of 49.0. The factory data remained below the 50.0 threshold for the 12th month in a row as business investment fell sharply due to higher borrowing costs. New factory orders also dropped significantly to 45.5 from September's reading of 49.2. The US Dollar Index has faced selling pressure near 107.00 after the release of the downbeat US economic data.

The precious metal would show a decisive move after the interest rate decision by the Federal Reserve (Fed). The precious metal fell sharply in the last two trading sessions even though markets widely expect that the Fed will keep interest rates unchanged in the 5.25%-5.50% range. However, a hawkish interest rate outlook is highly anticipated as robust spending by households and strong labor market conditions keep upside inflation risks alive.

Fed Chair Jerome Powell and his colleagues may keep the likelihood of further policy tightening on the table as the progress in inflation easing toward the 2% target has slowed due to strong wage growth. US households having high purchasing power are spending heavily, keeping the core Personal Consumption Expenditure (PCE) price index relatively stubborn.

Apart from the upcoming Fed decision, the broader appeal for Gold is still upbeat as Middle East tensions persist. The Israeli army is preparing for the ground incursion in Gaza as Israeli authorities rejected calls for a ceasefire. 

Daily Digest Market Movers: Gold price rebounds on downbeat US data

  • Gold price recovers quickly after weak US economic data ahead of the Federal Reserve’s monetary policy.
  • The Fed is expected to keep interest rates unchanged in the range of 5.25%-5.50%. Investors hope that higher US long-term bond yields and gradually declining price pressures will back the Fed to keep interest rates steady.
  • 10-year US Treasury yields have rebounded strongly to 4.91% on expectations that the Fed will keep interest rates higher for a significantly longer period. 
  • Fed policymakers said that higher US bond yields are sufficient to tighten financial conditions, dampening overall spending and investment.
  • Cleveland Fed Bank President Loretta Mester said ahead of the November monetary policy meeting that higher bond yields are equivalent to one interest rate hike of 25 basis points (bps). The Fed could use higher Treasury yields as a substitute for further policy tightening.
  • The Fed is expected to deliver hawkish guidance on interest rates as the US economy is resilient on the grounds of consumer spending, labor demand, and wage growth. 
  • Fed Chair Jerome Powell and his colleagues could keep the possibility of further policy tightening high as inflation looks persistent in the near term due to robust consumer spending and strong wage growth.
  • Jerome Powell said in his latest remarks that the current Fed policy rate is "fairly close" to the sufficiently restrictive level needed to ensure price stability over the medium term, but that the process of getting inflation down to 2% has a "long way" to go.
  • The US Dollar Index (DXY) finds offers near 106.80 after weaker-than-anticipated US private payrolls and factory data.
  • On the geopolitical front, Hamas’ promise of releasing hostages in a few days has eased safe-haven bets marginally. Meanwhile, the Israeli Defence Forces (IDF) has expanded their ground attack against Hamas in the northern section of the Gaza strip.
  • The broader outlook for Gold is still upbeat as a ceasefire between Israel and Palestine is less likely, while fears of Iran’s intervention in the Middle East conflict remain high.

Technical Analysis: Gold price jumps close to $1,990

Gold price rebounds after discovering buying interest near $1,970.00. Earlier, the precious metal faced an extended sell-off while attempting to stabilize above the psychological resistance of $2,000. The yellow metal has been trading in a range between $1,960 and $2,010 for the past week. The gold price has discovered some support near $1,970.00 but a volatile action is widely anticipated after the Fed’s policy announcement. Momentum oscillators continue to trade in a bullish trajectory.

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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