- Gold price faces pressure as hopes for an interest rate cut by the Fed have been postponed to May.
- Fed Daly emphasized the need to calibrate interest rates moves very carefully to keep risks balanced.
- Market participants will focus on the preliminary Q4 GDP and core PCE price index data this week.
Gold price (XAU/USD) falls back on Monday as investors reconsider the outlook on interest rates by the Federal Reserve (Fed). Policymakers are consistently supporting the tight interest rates narrative to ensure the return of inflation to the 2% target in a sustainable manner. The precious metal is facing some sell-off as the prospect of imminent rate cuts fades amid still-high price pressures due to robust consumer spending and full employment conditions.
Meanwhile, the absence of fresh cues about Middle-East tensions has also trimmed the appeal for bullions. Investors should brace for a sharp volatility ahead amid a data-packed week. The US Dollar Index (DXY) hovers near the crucial support of 103.00 ahead of the release of key economic indicators such as preliminary Q4 Gross Domestic Product (GDP) data and core Personal Consumption Expenditure (PCE) price index for December.
Daily digest market movers: Gold price drops while US Dollar rebounds
- Gold price corrects to near $2,020 as investors dialed back expectations of early rate cuts by the Federal Reserve.
- Stubborn price pressures, robust consumer spending and upbeat labor market conditions have forced traders to pare bets supporting an interest rate cut decision in March.
- As per the CME Group Fedwatch tool, chances in favour of an interest rate cut by 25 basis points (bps) in March have dropped to 42%, sharply down from the 70% seen two weeks ago.
- This indicates that investors don’t expect the Fed to reduce borrowing costs before the May monetary policy meeting.
- Apart from easing rate-cut expectations, the scheduled monetary policy announcement by the European Central Bank (ECB) for this week is also capping the upside for Gold price.
- Meanwhile, Fed policymakers continued to warn last week about a rapid ‘rate-cut campaign’ as it could spoil the entire efforts yet made to bring inflation to current levels of 3.9% from a whooping high of 6.6%.
- Early reduction in interest rates could also bring an uptick in the overall demand and henceforth boost prices.
- On Friday, San Francisco Fed Bank President Mary Daly said current monetary policy is in good shape and risks towards the economy are balanced.
- Mary Daly advised to reduce interest rates very carefully, keeping in mind that the return of inflation to the 2% target should not be compromised. She said the Fed will focus on maintaining full employment this year in contrast with the agenda of ensuring price stability in 2023.
- No comments from Fed officials are expected this week as the US central bank has entered its blackout period ahead of its meeting on January 31.
- This week, market participants will focus on the preliminary S&P Global PMIs for January, preliminary Q4 GDP data, and core PCE price index for December. Upbeat economic data would further squeeze expectations of a rate cut in March.
Technical Analysis: Gold price struggles to extend recovery above 20-day EMA
Gold price drops gradually to near $2,020 as bets supporting a rate-cut decision by the Fed in March have eased significantly. The precious metal struggles to regain traction as the 20-day Exponential Moving Average (EMA) around $2,031 is consistently acting as a barricade for bulls. Going forward, a sideways performance is highly likely as investors await the crucial economic data due later this week, which is expected to provide a fresh outlook on inflation and the interest rate outlook.
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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