- Gold price climbs to $2,190 as the US Dollar drops with eyes on US core PCE inflation data.
- The Fed remains confident that inflation is broadly easing despite recent hot readings.
- The US yields fall as expectations for the Fed lowering interest rates from June rebound.
Gold price (XAU/USD) jumps above a two-day high near $2,190 in Tuesday’s early American session as the US Dollar corrects. The US Dollar faces downward pressure as Federal Reserve (Fed) policymakers seem to be growing confident about easing price pressures, foreseeing three interest-rate cuts this year despite hot inflation readings in January and February.
Investors look for fresh cues about the inflation outlook to know when the Federal Reserve will start reducing interest rates. The market participants will keenly focus on the United States core Personal Consumption Expenditure price index (PCE) data for February, which will be published on Friday.
Evidence of easing price pressures could strengthen Gold prices as it will diminish hopes for the Fed to keep interest rates higher for a longer period. However, stubborn inflation data will negatively impact the Gold price as it will increase the opportunity cost of investing in it. Instead, investors could opt for interest-bearing assets such as bonds, whose appeal would increase due to higher yields.
Daily digest market movers: Gold price jumps higher despite upbeat US Durable Goods Orders
- Gold price rises to $2,190, capitalizing on a modest correction in the US Dollar. The precious metal jumps higher as Federal Reserve policymakers look set to lower interest rates in June amid increasing evidence that inflation is moving in the right direction. The US Dollar Index (DXY), which measures the US Dollar’s value against six major currencies, falls from a one-month high of 104.50 to 104.10.
- The Fed is confident about easing inflationary pressures even though price pressures turned out hotter than expected in the first two months of 2024. Fed Governor Lisa Cook said in an event hosted by Harvard University on Monday, “Although housing-services inflation remains quite high, the current low rate of increase on new rental leases suggests that it will continue to fall.” Cook endorsed a cautious approach when asked about monetary policy easing.
- Separately, Chicago Fed Bank President Austan Goolsbee said in an interview with Yahoo Finance on Monday that the inflation situation is uncertain due to higher housing inflation. However, he is confident that the fundamental story of inflation returning to the 2% target has not changed.
- Last week, the Fed stuck with projections of reducing interest rates three times this year. This has reinforced market expectations for the Fed to cut interest rates from the June policy meeting. According to the CME FedWatch tool, there is an almost 70% chance that a rate cut will be announced in June. The chances were at 60% last week before the Fed’s policy announcement. Increased Fed rate cut expectations have kept the downside in the Gold price limited.
- This week, investors will shift focus to the core PCE price index data for February to know more about Fed rate-cut timing. The annual core PCE reading is anticipated to have grown steadily by 2.8%. The monthly inflation data is expected to have risen by 0.3%, slower than the 0.4% increase seen in January.
- Before that, the US Census Bureau reported upbeat Durable Goods Orders data for February. Fresh Durable Goods Orders were up by 1.4% against expectations of 1.3%. In January, the Durable Goods Orders dropped significantly by 6.9%.
Technical Analysis: Gold price recovers to $2,190
Gold price recovers to $2,190 as momentum oscillators rebound. The 14-period Relative Strength Index (RSI) edges up after dropping to 64.00. Last week, the Gold price corrected sharply from all-time highs of $2,223 as oscillators showed extremely overbought signals.
The near-term demand for the Gold price is bullish as the 20-day Exponential Moving Average (EMA) at $2,145 is sloping higher.
On the upside, the Gold price could face resistance near the 161.8% Fibonacci extension level at $2,250. The Fibonacci tool is plotted from December 4 high at $2,144.48 to December 13 low at $1,973.13. On the downside, December 4 high at $2,144.48 will likely support the Gold price bulls.
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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