Gold strengthens on mounting Middle East tensions, Fed policy in focus

Gold price delivers strong upside move as geopolitical tensions deepen.
Fed policy, labor market and Manufacturing PMI data for December will remain in the spotlight.
The Fed is expected to keep interest rates unchanged for the fourth straight time.

Gold price (XAG/USD) remains upbeat as mounting geopolitical tensions have improved the appeal of bullion. The precious metal attracts significant bids as the drone attack on US bases near northeastern Jordan has impacted market sentiment. In response to that, US President Joe Biden has pleged to retailiate at a time and the place that will they choose. Meanwhile, Iran has denied claims stating their involvement in aerial drone attacks. In addition, a moderate increase in the U S Core Personal Consumption Expenditures (PCE) data for December has softened the inflation outlook.

This week, investors should brace for a high volatile action as the interest rate decision by the Federal Reserve (Fed) will be followed by the Institute of Supply Management (ISM) Manufacturing PMI and Nonfarm Payrolls (NFP) report for December. The Fed is widely anticipated to keep interest rates steady in the 5.25-5.50% range but fresh guidance on interest rates will be keenly watched. Investors would look for cues of whether Fed policymakers continue leaning towards keeping interest rates restrictive till June or are likely to signal a dovish decision for March or May.

Daily Digest Market Movers: Gold price remains upbeat as safe-haven appeal improves

Gold price discovers strong buying interest on Monday as investors rush for safe-haven assets due to deepening Middle East tensions.
The precious metal witnesses significant bets as geopolitical tensions mount after a drone attack on US service members stationed in northeastern Jordan.
Meanwhile, continued attacks on energy shipments in the Red Sea by Iran-backed-Houthis have disrupted the global supply chain.
This week, market participants will focus on the Federal Reserve’s first monetary policy announcement of 2024, which is scheduled for Wednesday.
As per the CME FedWatch Tool, investors are pretty confident that interest rates will remain unchanged in the range of 5.25-5.50% for the fourth straight time.
While major focus will be on the interest rate outlook. Traders see a higher probability of the Fed reducing interest rates from May as policymakers have been reiterating the need for maintaining restrictive interest rates for a longer period until they get convinced that inflation would come down to the 2% target in a timely manner.
The US Dollar Index (DXY) could come under pressure if the Fed signals that it could commence its rate-cutting campaign from March.
A soft core PCE price index report for December, released on Friday, failed to uplift expectations of a rate-cut from March.
Monthly core PCE grew by 0.2% as expected while annual underlying inflation data decelerated to 2.9% against expectations of 3.0% and the former reading of 3.2%.
Apart from the Fed policy, it will be a volatile week as Manufacturing PMI, and ADP and official Employment data have lined-up for release.
But first, market participants will look for the US JOLTS Job Openings data, which will be published on Tuesday. This will indicate how strong the labor demand is despite interest rates remaining elevated.
Investors have anticipated that US employers posted fresh 8.75M jobs in December against 8.79M in November.

Technical Analysis: Gold price jumps to near $2,030

Gold price approaches the horizontal resistance of the Ascending Triangle chart pattern plotted from January 19 high at $2,039.50, on the two-hour timeframe. The upward-sloping border of the aforementioned pattern is plotted from the January 17 low near $2,002. The pattern has a bullish bias, suggesting a breakout higher will follow its completion.

On a daily time frame, the precious metal continues to put efforts for sustainability above the 20-day Exponential Moving Average (EMA), which trades around $2,030.

Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

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