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- Gold price hovers around $2,220, exhibiting strength ahead of US core PCE Price Index data.
- The US Dollar refreshes to a six-week high amid cautious market sentiment.
- 10-year US bond yields rise as Fed rate cut bets for June have dropped.
Gold price (XAU/USD) holds onto gains above $2,200 in Thursday’s late European session. The precious metal exhibits firm footing ahead of the United States core Personal Consumption Expenditure (PCE) Price Index data for February, which will be published on Friday.
The Federal Reserve (Fed) could dial back rate cut expectations if the underlying inflation data suggests price pressures persist. Such a scenario would lead to an increase in yields on interest-bearing assets, such as Treasury bonds, whose appeal strengthens in a high-inflation environment. On the contrary, softer-than-expected inflation could boost expectations for a Fed rate cut in the June meeting, and support the broad narrative of three rate cuts for overall 2024.
The Fed is expected to maintain a cautious approach to rate cuts as initiating them too soon or lowering them too much could reinforce price pressures again. Meanwhile, a delay in cutting interest rates could result in unnecessary pressure on the labor market and the economy.
The US Dollar Index (DXY), which measures the US Dollar’s value against six major currencies, refreshes to a six-week high at 104.72 amid dismal market sentiment ahead of the release of the Fed’s preferred inflation gauge.
Daily digest market movers: Gold price rises while US Dollar refreshes six-week high
- Gold price climbs above $2,200 ahead of the US core PCE Price Index data for February. The Federal Reserve’s preferred inflation gauge is expected to have grown at a steady pace of 2.8% on year. The monthly underlying inflation data is forecasted to have increased by 0.3%, slowing from January’s 0.4% advance. Investors will keenly focus on the inflation data to gauge when the Fed may begin trimming interest rates.
- Stubborn inflation data could allow the Fed to maintain a hawkish rhetoric. Fed policymakers have been reiterating that rate cuts are only appropriate when they are convinced that inflation will return sustainably to the 2% target. Sticky price pressures, in turn, would weaken the Gold’s appeal as it would increase the opportunity cost of investing in it.
- According to the CME FedWatch tool, traders are pricing in a 60% chance that a rate cut will be announced in June. The chances for Fed pivoting to rate cuts in June have dropped from 70% on Thursday after a slightly hawkish guidance from Fed Governor Christopher Waller.
- Christopher Waller said in a speech at an Economic Club of New York on Wednesday that the Fed needs not to rush for rate cuts. However, he keeps hopes of rate cuts alive saying, “Further progress expected on lowering inflation will make it appropriate for the Fed to begin reducing the target range for the federal funds rate this year,” reported Reuters.
Technical Analysis: Gold trades above $2,200
Gold price trades close to the crucial resistance of $2,200. The precious metal aims to recapture the all-time highs slightly above $2,220. All short-to-long term Exponential Moving Averages (EMAs) are sloping higher, suggesting strong near-term demand.
The Gold price could face a hurdle near $2,250, which coincides with the 161.8% Fibonacci extension, after breaking above the resistance of $2,220. 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 support the Gold price bulls.
The 14-period Relative Strength Index (RSI) rebounds after cooling down to 64.00 from the extremely overbought zone.
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.
