- Gold price seeks potential support but it is pressured by a strong US Dollar and increasing Treasury yields.
- Fed’s higher for longer interest-rate stance keeps Gold price under pressure.
- US Durable Goods Orders are seen contracting at a slower pace in August.
Gold price (XAU/USD) faces a sell-off as Federal Reserve (Fed) policymakers continue to favor further policy tightening due to the resilient United States economy. The precious metal struggles for a firm footing as Fed policymakers expect that additional efforts will likely be needed to bring inflation back to the desired rate as decent labor demand and robust consumer spending momentum keep price pressures high.
While fears of a global slowdown continue to build pressure on risk-sensitive assets, the US Dollar and Treasury yields remain upbeat on the Fed’s “higher for longer” interest-rate stance. Going forward, investors will focus on the US Durable Goods Orders data on Wednesday, which will provide guidance about the health of the country’s manufacturing sector.
Daily Digest Market Movers: Gold price weakens amid stronger US Dollar
- Gold price finds an interim support near $1,910.00 after an intense sell-off. The broader trend remains weak as Federal Reserve policymakers continue to support the “higher for longer” plot to ensure that inflation softens to 2%.
- The broader trend in the Gold price is directionless as the downside is also supported by expectations of no more interest rate hikes in the last quarter of 2023.
- As per the CME Group Fedwatch tool, traders see almost an 82% chance that interest rates will remain steady at 5.25%-5.50% at the November monetary policy meeting. For the remainder of 2023, the possibility for steady interest rates is at 61%.
- On Monday, Gold price was pressured by hawkish remarks from Fed policymakers, namely from Minneapolis Federal Reserve Bank President Neel Kashkari and Boston Fed President Susan Collins.
- Fed Governor Kashkari said that the central bank will likely need to raise interest rates further and keep them elevated for some time to bring down inflation to 2%. "If the economy is fundamentally much stronger than we realized, on the margin, that would tell me rates probably have to go a little bit higher, and then be held higher for longer to cool things off," he added, as reported by Reuters.
- About rate cut expectations, Fed Kashkari cited that if inflation softens in 2024, the Fed will cut rates to avoid too much tightening.
- Fed’s Collins said on Friday that a further rate hike is certainly not off the table. She further added that inflation can fall with only a modest rise in unemployment and that core services inflation excluding shelter has not yet shown a sustained improvement.
- Contrary to hawkish Fed policymakers, Morgan Stanley’s Chief US Economist Ellen Zentner believes that the Fed is done hiking rates.
- The US Dollar Index (DXY) consolidates near a fresh 10-month high at 106.20 as incoming data continues to point to a resilient US economy and upbeat labor market conditions. 10-year US Treasury yields rose sharply to 4.55%.
- While the US Dollar and Treasury yields have increased significantly, the pace of decline in the Gold price is slow, indicating a supported downside on expectations that the Fed is done with hiking interest rates.
- For further action, investors await the Durable Goods Orders report for August, which will be released on Wednesday. Orders are seen contracting at a slower pace of 0.4% against the 5.2% decline seen in July.
- The US manufacturing sector is already going through a vulnerable phase. The US Manufacturing PMI has been contracting for a long period and a weak new order book indicates that factory activity will remain in contraction.
Technical Analysis: Gold price seems declining to $1,900
Gold price skids below $1,910.00 while the overall trend is sideways amid uncertainty over the interest rate outlook. On a daily chart, the precious metal auctions in a Symmetrical Triangle chart pattern, which demonstrates a volatility compression. The 200-day Exponential Moving Average (EMA) around $1,910.00 continues to act as a major support for Gold price, while the 50-day EMA near $1,927.00 is acting as a major resistance.--
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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