Gold price remains broadly sideways on Fed's diverging views
- Gold price remains sideways amid disparities between investors and Fed policymakers on monetary policy outlook.
- After several members dismissed the need for rate cuts Fed Daly sees cuts as appropriate in 2024.
- This week, US Durable Goods Orders and core PCE price index data will be keenly watched.
Gold price (XAU/USD) struggles for a direction with further upside seemingly imminent as the Federal Reserve (Fed) sticks its head above the parapet, showing the guts to discuss interest rate cuts. The precious metal is expected to continue capitalizing as the US Dollar falls on deepening expectations of three rate cuts in 2024, amid significant progress on inflation towards 2%.
Fed policymakers have characterized the recent rally in the Gold price as “exaggerated” citing that the central bank is focusing on how much longer the monetary policy should remain tight to achieve price stability and not on lowering borrowing rates currently. This week, action in the Gold price will be guided by the United States Durable Goods Orders and core Personal Consumption Expenditure price index (PCE).
Daily Digest Market Movers: Gold price struggles for adirection
- Gold price struggles over a direction after recovering from $1,980.00 as Federal Reserve policymakers are less-emphasizing rate cut discussions, stating them conditional if an improvement in inflation continues.
- The precious metal trades sideways on Tuesday after falling slightly on Monday as Fed policymakers downplay rate cut discussions and shift spotlight to how long interest rates will remain restrictive to bring down inflation to 2%.
- Cleveland President Loretta Mester said, in an interview on Monday, that the next phase in the agenda of achieving price stability is to focus on longevity of higher interest rates to achieve price stability in a timely manner.
- Loretta Mester said that markets capitalized on the last part of Fed Chair Jerome Powell’s commentary at the interest rate policy announcement exceptionally, when he discussed expectations of three rate cuts in 2024.
- Contrary, San Francisco Fed Bank President Mary Daly said that rate cuts are appropriate in 2024 amid a significant improvement in inflation this year.
- Mary Daly said that her expectations are aligned with the Fed’s median projections of lowering borrowing costs by 75 basis points (bps) in 2024. She added that the Fed must make sure that price stability should not be achieved at the cost of a higher Unemployment Rate.
- Last week, Atlanta Fed Bank President Raphael Bostic said he sees two rate cuts in 2024 starting from the third quarter.
- Raphael Bostic warned that policymakers need ‘several months’ to accumulate sufficient data to build confidence for exiting from the restrictive monetary policy stance.
- Meanwhile, the US Dollar Index (DXY) continues to trade sideways around 102.50 ahead of Durable Goods Orders and core PCE price index for November, which will be released later this week.
- The USD Index continues to hold its slight recovery witnessed on Friday after commentary from New York Federal Reserve (Fed) Bank President John Williams.
- John Williams said it is premature to speculate about rate cuts as the central bank is not talking about them right now.
- Meanwhile, 10-year US Treasury yields fell further to 3.91% amid elevated hopes of an exit from a tight interest rate stance for the Fed in 2024.
- Gold price is expected to continue gaining traction for a longer period, knowing that interest rates will get lower in 2024.
Technical Analysis: Gold price trades choppy around $2,040
Gold price trades back and forth near $2,040 amid an absence of potential economic triggers ahead. The precious metal corrects gradually this week but remains above the 20-day Exponential Moving Average (EMA), which indicates that the short-term trend is bullish. A decisive break above $2,050.00 could expose it to further upside towards $2,100.00
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.
