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Gold price clings to gains above $2015 amidst quiet session

  • Gold climbs to $2016.30, driven by US inflation surpassing forecasts, signaling ongoing price pressure.
  • The diminished likelihood of imminent Fed rate cuts enhances Gold's allure as the USD has weakened since last Tuesday.
  • The decline in US Treasury and real yields underpin Gold's surge with a rising TIPS yield reflecting higher safe-haven demand.

Gold price extended its gains for three consecutive days after last week’s economic data from the United States (US) revealed that inflation remains above the US Federal Reserve’s (Fed) target. The Consumer Price Index (CPI) and the Producer Price Index (PPI) in January exceeded the consensus, catching traders off guard, which trimmed the odds for a Fed rate cut in March and May. That sponsored a leg-up in the Greenback (USD), which has remained on the defensive since last Tuesday. The XAU/USD exchanges hands at $2016.30.

Traders seeking protection turned to the yellow metal following the latest inflation reports. Additionally, the fall in US Treasury bond yields, particularly the 10-year note that hit a year-to-date (YTD) high of 4.332%, retraced four basis points to 4.293%. Consequently, real yields, which correlate negatively with Gold prices, fell from around 2.04% reached on Wednesday to 1.950%, as reflected by the yield on the US 10-year Treasury Inflation-Protected Securities (TIPS) yield.

Daily digest market movers: Gold advanced despite investors pushing back Fed rate cuts to June

  • The CME FedWatch Tool sees traders expect the first 25 bps rate cut by the Fed in June 2024.
  • As of today, investors are pricing in 97 basis points of easing throughout 2024.
  • The latest inflation reports from the US triggered a change of language from Fed officials, who struck a “cautious” tone. Atlanta Fed President Raphael Bostic suggested the Fed is in no rush to ease policy, saying the Fed could be patient.
  • In regard to that, San Francisco Fed President Mary Daly stated, “We will need to resist the temptation to act quickly when patience is needed and be prepared to respond agilely as the economy evolves.”
  • This week, the US economic schedule will feature the release of the latest Federal Reserve Open Market Committee (FOMC) Minutes alongside Fed officials' speeches beginning on Wednesday.
  • Traders will get further cues from US S&P Global PMIs, Initial Jobless Claims data and the Chicago Fed National Activity Index, usually a prelude to the Institute for Supply Management (ISM) Manufacturing PMI.

Technical Analysis: Gold stays above 100-day SMA, eyes key resistance near $2,030

Gold´s daily chart portrays the non-yielding metal as neutral to downwardly biased despite staying above the 200-day Simple Moving Average (SMA) at $1,965.46. If buyers would like to regain control, they must challenge the 50-day SMA at $2,032.71. Once cleared, the next stop would be $2,050, ahead of the latest cycle high at $2,065.60.

On the flip side, if sellers step in and push prices below the $2,000 figure, that will expose the 100-day SMA at $1,998. The next stop would be the December 13 low at $1,973.13, followed by the 200-day SMA at $1,965.47.

Central banks FAQs

What does a central bank do?

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

What does a central bank do when inflation undershoots or overshoots its projected target?

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

Who decides on monetary policy and interest rates?

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Is there a president or head of a central bank?

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

Author

Christian Borjon Valencia

Markets analyst, news editor, and trading instructor with over 14 years of experience across FX, commodities, US equity indices, and global macro markets.

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