- Gold price consolidates after a two-day sell-off amid a light economic calendar.
- The US Dollar falls slightly, but its broader appeal is bullish amid a robust performance of the US economy.
- A strong order book for US manufacturing and service sectors has set a positive undertone for 2024.
Gold price (XAU/USD) struggles to find a direction in Tuesday’s European session amid a lack of data drivers as the economic calendar in the United States is light this week. The two-day sell-off in the precious metal has paused for a while as various Federal Reserve (Fed) are lined up to provide their outlook on interest rates. The rally in the US Dollar Index (DXY) has paused, but more upside is likely as Fed policymakers consistently deny the need for early rate cuts.
The chances of aggressive rate cuts by the Fed have sharply diminished as the US economy is outperforming. Fed policymakers have warned that an early rate-cut decision could support demand and boost the economy, which would slow the progress of inflation declining towards the 2% target.
Daily digest market movers: Gold price trades sideways as Fed speakers line up
- Gold price finds selling pressure while attempting to extend recovery above the crucial resistance of $2,030.
- The precious metal has fallen as Federal Reserve officials push back expectations of aggressive rate cuts due to resilient domestic growth and a stubborn inflation outlook.
- The CME Fedwatch tool shows that a rate cut in March is unlikely. For May’s policy meeting, bets favoring an interest rate reduction by 25 basis points (bps) have come down to 55%.
- On Monday, Minneapolis Federal Reserve Bank President Neel Kashkari said the lower risk to US economic woes had bought time for the central bank to reconsider rate cuts.
- Increasing employment levels and robust economic prospects consistently improve hopes of a “soft landing” for the Fed.
- After robust labor market and Manufacturing PMI data for January, the Services PMI also outperformed expectations. The Services PMI represents the service sector, which accounts for two-thirds of the US economy, rose to 53.4 against expectations of 52.0 and the prior reading of 50.5.
- The sub-index gauging new orders for service enterprises rose to 55.0 against expectations of 52.8, indicating a strong order book for 2024.
- On the geopolitical front, hopes for a ceasefire between Israel and Palestine in Gaza could exert more pressure on the Gold price.
- The US Secretary of State Antony Blinken and Saudi’s crown prince discussed “regional coordination” on ending the war in Gaza and plans for the strip after the fighting ends, CNN reported.
Technical Analysis: Gold price consolidates near $2,025
The Gold price oscillates in a tight range around $2,025 on Tuesday. The precious metal remains inside Monday’s trading range, which indicates that investors await a fresh economic trigger for further guidance. The 50-day Exponential Moving Average (EMA) at $2,021 continues to provide support. On a broader note, the Gold price is expected to remain well-supported above the psychological cushion of $2,000. Meanwhile, the 14-period Relative Strength Index (RSI) indicates a lackluster performance ahead, oscillating in the 40.00-60.00 range.
Fed FAQs
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.
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.
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.
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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