- Gold price has been hit hard amid uncertainty over US Retail Sales and Industrial Production data.
- A strong US Retail Sales data would provide more room for the Fed to maintain higher interest rates.
- Further escalation in Middle East tensions could bring some revival in the Gold price.
Gold price (XAU/USD) witnesses a sell-off after failing to reclaim the weekly high above $2,060. The precious metal drops as investors reconsider the timeframe in which the Federal Reserve (Fed) may reduce interest rates. This comes after the release of the sticky Consumer Price Index (CPI) report for December, as well as hawkish comments from European Central Bank (ECB) officials recalibrating broader market expectations.
While markets continue to lean towards a rate cut decision in March, policymakers are in no hurry to endorse a dovish stance on interest rates. The consumer price inflation in the United States economy is almost double the required rate of 2%, labor demand is steady and the chances of a recession are low despite interest rates remaining in the range of 5.25-5.50%. This would allow Fed policymakers to maintain a restrictive monetary policy stance for the time being.
Going forward, monthly US Retail Sales, the Industrial Production data and the Fed’s Beige Book are expected to provide fresh cues about the interest rate outlook.
Daily Digest Market Movers: Gold price slides while US Dollar, yields soar
- Gold price corrects to near the crucial support of $2,040 as the US Dollar Index (DXY) has recovered sharply ahead of crucial United States economic data for December.
- A strong run-up in the precious metal that was propelled by firm bets in favour of early rate cuts by the Federal Reserve and deepening Middle East tensions, has stalled for now.
- As per the CME Fedwatch tool, chances in favour of an interest rate cut in March have eased nominally to 66% against 70% recorded earlier.
- A gradual decline has come as investors are reconsidering strong optimism for Fed starting the rate-cut cycle from March after getting mixed cues from stubbornly higher headline consumer price inflation and softer factory gate price data.
- Investors would get more cues about when the Fed could plan rate cuts after the release of the monthly US Retail Sales and Industrial Producer data, which are due to be released on Wednesday.
- Retail Sales are expected to have grown at a higher pace of 0.4% against 0.3% increase in November. Consumer spending excluding automobiles is estimated to have grown at a steady pace of 0.2%.
- The Industrial Production data is seen stagnant against 0.2% growth in November on a monthly basis.
- Upbeat economic data would comfort Fed policymakers for maintaining a restrictive monetary policy stance while a soft report will firm the case of rate cuts in March.
- Before that, commentary from Fed Governor Christopher Waller will be keenly watched by market participants. Investors are eager to know how the Fed is considering the timeframe for the rate-cut cycle after the release of sticky consumer price inflation data.
- The appeal for the Gold price has not been impacted on a broader basis as crises in the Middle East region have deepened after the airstrikes from the US and the United Kingdom.
- Iran-backed Houthi rebels have threatened to retaliate for attacking groups in Yemen, which will keep risk sentiment on its toes.
- The US Dollar Index has broken to a new high slightly above 103.00 as investors hope that other central banks will also start reducing interest rates earlier than previously projected. Meanwhile, the 10-year US Treasury yield has rebounded swiftly above 4.0%.
Technical Analysis: Gold price looks for support around 20-day EMA
Gold price has faced a sharp sell-off after failing to recapture the weekly high of $2,062. The precious metal has dropped to near $2,030 and is expected to remain on tenterhooks before getting fresh cues about the timing of rate cuts from the Fed. The yellow metal has surrendered entire gains generated on Monday and has corrected below the 20-day Exponential Moving Average (EMA), which trades around $2,039.
More downside could appear in the Gold price if it fails to defend the January 3 low of $2,030, which will expose it towards the psychological support of $2,000.
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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