Gold retreats as US yields strengthen by diminished Fed rate cut hopes

Gold price falls back as US Treasury yields extend upside.
The precious metal remains under pressure as Fed rate cut expectations for June wane.
Stubborn US PPI data suggested inflation pressures persist.

Gold price (XAU/USD) retreats in Friday’s early New York session as US bond yields strengthens. Market expectations for the Federal Reserve (Fed) reducing interest rates in the June policy meeting have diminished, maintaining downside pressure on the Gold price.

The precious metal registered a sharp sell-off on Thursday on hotter-than-expected United States Producer Price Index (PPI) figures for February. Fed policymakers have brought down price pressures significantly but the last mile before the 2% target appears to be sticker than progress yet made. The prospect of high interest rates benefited the US Dollar (USD), weighing on the XAU/USD pair.

10-year US Treasury yields climb to 4.31% as expectations for the Fed announcing rate cuts in June fade. This has significantly increased the opportunity cost of holding investments in non-yielding assets such as Gold. Meanwhile, the US Dollar Index (DXY) refreshes a three-week high near 103.50.

Daily digest market movers: Gold price falls back as US yields extend upside

The Gold price falls after failing to recapture $2,170 as yields on US Treasury bonds eye more upside. The broader appeal of Gold remains uncertain as investors reassess expectations for Federal Reserve rate cuts in the June policy meeting after the February US PPI report indicated that producers hike prices of goods and services at a higher pace than anticipated.
Market expectations for Fed rate cuts in June have dented as hot PPI data has indicated that Fed policymakers need not rush to reduce interest rates. According to the CME FedWatch tool, the chances for a rate cut have come down to 59% from 74% a week ago.
This week, the consumer price index (CPI) data also showed inflation remains sticky. Stubborn price pressures have cast doubts over Fed Chair Jerome Powell’s commentary in his Congressional testimony that the central bank is not far from gaining confidence that inflation will return to the desired rate of 2%.
Apart from the US PPI, the US Census Bureau reported that Retail Sales in February rebounded less than expected. The Retail Sales rose 0.6% while investors anticipated a 0.8% growth. In January, sales contracted by 1.1%, downwardly revised from the 0.8% decline previously estimated.
Meanwhile, investors are shifting focus to the Fed’s interest rate decision, which will be announced on Wednesday. The Fed is widely anticipated to keep interest rates unchanged in the range of 5.25%-5.50%. The central bank will also release economic forecasts and the dot plot, which indicates Fed officials’ expectations for interest rates over time.

Technical Analysis: Gold price drops to $2,160

Gold price faces pressure near $2,170, trading inside Thursday’s trading range. The precious metal has been confined between $2,153 and $2,180 in the last three trading sessions, indicating indecisiveness among market participants. The yellow metal exhibits a Symmetrical Triangle formation on an hourly timeframe, which indicates a sharp volatility contraction.

On a daily timeframe, an advancing 20-day Exponential Moving Average (EMA) near $2,115 indicates that the near-term demand is still strong. Still, any upside is expected to remain restricted.

The 14-Relative Strength Index (RSI) retraces from its peak near 84.50, although the upside momentum is still active.

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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