Gold price drops as US Dollar, yields recover despite firm rate cut bets
- Gold price eases intraday gains amid recovery in US Treasury yields.
- The broader appeal for the Gold price is bullish as Fed may unwind its restrictive policy stance sooner.
- The USD Index attempts recovery as investors start digesting Fed's rate cut hoopes
Gold price (XAU/USD) dropped on Thursday after registering a fresh three-week high. The precious metal fell as profit-booking kicked-in after the sharp rally of the last two weeks. This came as the opportunity cost of owning the non-yielding metal rose amid US Treasury yields showing signs of recovery.
The broader appeal for the Gold price, however, is expected to remain upbeat as investors see the Federal Reserve (Fed) reducing interest rates from March and with underlying inflation clearly now in a downward trajectory. The US Dollar is consistently facing a sell-off amid early rate cut expectations, helping to underpin the precious metal’s Dollar-denominated value.
Contrary to investors’ expectations, Fed policymakers see a high likelihood of a market reaction on rate-cut commentary from Federal Reserve Chairman Jerome Powell. Fed policymakers have been considering rate cut discussions as “premature” in the current scenario amid absence of confidence in inflation declining towards 2%.
Meanwhile, the US Department of Labor has reported Initial Jobless Claims (IJC) for the week ending December 22. Individuals claimed jobless benefits rose to 218K against the cosnensus of 210K and the prior reading of 206K.
Daily Digest Market Movers: Gold price drops further as US yields, Dollar rebound
- Gold price faces marginal selling pressure amid a recovery in US Treasury yields. The 10-year US Treasury yields rebounded to near 3.82%,
- Earlier, the Gold price extended its four-day winning spell as market participants are pricing in a rate cut by the Federal Reserve from March 2024.
- The Fed is expected to start reducing interest rates as inflation in the United States economy is in a downtrend.
- As per the CME Fedwatch tool, market participants see more than 88% chance of the Fed cutting interest rates in March. The likelihood of the Fed trimming interest rates further in May is more than 65%.
- Bets in favour of early rate cuts by the Fed are very healthy as the underlying inflation rate has dropped to 3.2% in November. The Fed, in its latest projections, anticipated this number at the end of December 2023.
- There is a reasonable chance that the Fed will achieve a soft landing as the Unemployment Rate has been steady around 3.7% and lay-offs have remained lower than new payroll additions in every month of 2023.
- As 2024 is set to kick-in, a further move in the Gold price would be guided by whether investors have priced in rate cuts too much or whether economic shrinkage will emerge suggesting current pricings are fair.
- A league of investors and Fed policymakers believe that investors have gone too far ahead in discounting rate cuts. The impact is clearly visible in the US Dollar Index (DXY), which is down 6.31% from October’s high of 107.35.
- The USD Index is expected to end the year with a loss of almost 2.5% on expectations that the Fed would be the first major central bank to cut.
- Nevertheless, other western economies are also expected to start reducing interest rates as price pressures are easing globally.
- Unlike other economies that are prone to economic contraction, the US economy is resilient. Sheer strength in economic prospects could keep additional inflationary pressures above the required rate of 2%.
- Due to a light economic calendar, second-tier weekly Initial Jobless Claims data for the week ending December 22 may bring some action in the FX domain.
- Market participants are anticipating individuals claiming jobless benefits rose to 210K, nominally higher than the former reading of 205K.
- Next week, employment and Manufacturing PMI data for December will keep investors busy.
- Meanwhile, import of Gold in China from Hong Kong rose 37% in November after the People's Bank of China (PBoC) eased some import restrictions to meet expected demand for the Chinese New Year, as reported by Reuters.
Technical Analysis: Gold price falls from fresh three-week high
Gold price fell gradually after printing a fresh three-week high near $2,090. The long-term appeal for the Gold price is still upbeat as investors hope that the opportunity cost of holding non-yielding bullions will be lower as interest rates come down. The precious metal is expected to remain in a bullish trajectory, being supported by upward-sloping 20 and 50-day Exponential Moving Averages (EMAs). Momentum oscillators have shifted into the bullish range, indicating more upside ahead.
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.
Author
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
