- Gold price extends its recovery in a holiday-shortened week.
- The US PPI rose strongly in January but this was put down to seasonally adjusted fluctuations.
- Fed Bostic sees two rate cuts this year commencing from summer.
Gold price (XAU/USD) continues its winning spell for the third session in a row on Monday despite waning expectations of rate cuts by the Federal Reserve (Fed) before the June monetary policy meeting. The precious metal maintains strength even though sticky Consumer Price Index (CPI) and Producer Price Index (PPI) data for January have prompted prospects of persistent core Personal Consumption Expenditure price index (PCE) data.
Investors believe that the reasoning behind higher Gold price is less significant PPI data for January as prices moved up due to some seasonal adjustment problems. In addition to that, Fed policymakers have considered the surprise rise in the latest consumer price inflation data as a one-time blip, emphasizing the longer trend, which indicates that inflation is moving decisively down.
Meanwhile, the forecast from Atlanta Federal Reserve Bank President Raphael Bostic that progress in underlying measures of inflation could allow the Fed to start reducing interest rates from summer has eased opportunity cost of holding non-yielding assets such as Gold.
Daily Digest Market Movers: Gold rises for third session while US Dollar remains under pressure
- Gold price advances strongly to $2,020 as the US Dollar remains under pressure, although hotter-than-anticipated PPI data for January has cooled down expectations of rate cuts for May monetary policy meeting by the Federal Reserve.
- The CME FedWatch tool indicates that trades see a steady interest rate decision in the March and May monetary policy meetings. The Fed is expected to cut interest rates by 25-basis points (bps) in the June policy meeting.
- Stronger consumer price inflation and PPI data for January have pushed back expectations of Fed rate-cuts before June.
- Sticky price pressures have bought more time to the Fed to reassess the need of rate cuts. Premature rate cuts could dent the efforts yet made in taming inflation from its historic highs to where it is now by flaring it up again.
- Higher-than-projected CPI and PPI data have deepened fears of escalating core PCE price index data for January – the preferred gauge for Fed policymakers for preparing monetary policy remarks.
- Atlanta Fed Bank President Raphael Bostic said he was a little surprised by recent inflation data, but broader progress in the fight against inflation has opened doors for rate cuts in the summertime.
- However, Raphael Bostic reiterated the need for good inflation data in the coming months to be convinced that inflation is truly falling. Bostic sees two rate cuts in 2024.
- Meanwhile, the US Dollar Index (DXY), which gauges the Greenback’s value against six rival currencies, has declined to 104.20 ahead of a holiday-truncated week in the US economy. The US markets will remain closed on Monday because of President’s Day.
- This week, investors will focus on the Federal Reserve Open Market Committee (FOMC) minutes for January’s policy meeting, which will be released on Wednesday.
- The FOMC minutes will provide a detailed explanation behind keeping key rates unchanged in the range of 5.25%-5.50% in January and fresh outlook on interest rates.
- Apart from that, investors will focus on the preliminary S&P Global Manufacturing PMI for February, which will be published on Thursday.
Technical Analysis: Gold price revives to near 20-day EMA around $2,020
Gold price extends its recovery for the third straight trading session even though the Fed is maintaining its hawkish rhetoric due to sticky price pressures. The precious metal reverses to the 20-day Exponential Moving Average (EMA), which trades around $2,022. The outlook for the Gold price could turn bullish if it manages to sustain above the 20-day EMA.
The downward-sloping trendline from December 28 high at $2,088 may continue to act as a barrier for the Gold price. The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, which shows a sideways outlook for the Gold price.
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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