- Gold price attracts bids below $1,860.00 after a slight correction in the USD.
- The U.S. economy remains resilient thanks to falling inflation, stable labor demand and strong consumer spending.
- The Fed’s Kashkari said current interest rates are not restrictive enough to reduce inflation to 2%.
The price of Gold (XAU/USD) rebounded after a four-day streak of losses, while the US dollar struggled to extend its recovery on Friday, ahead of the US core personal consumption expenditure (PCE) price index data for August. However, the bullish movement in the precious metal is likely to be short-lived, as officials at the Federal Reserve (Fed) foresee a new increase in interest rates by the end of the year, amid the resistance of the US economy and persistent inflationary pressures.
The U.S. economy has performed well on inflation, the labor market and consumer spending, but factory activity continues to worry policymakers amid a poor demand outlook. Investors will be closely watching the September manufacturing PMI report, due out on Monday, for more clues on the current health of the manufacturing sector. Markets expect PMI data to show that factory activity contracted for the 11th consecutive month.
Daily summary of market movements: Gold price finds support as USD corrects
- Gold price attempts to recover after defending crucial support at $1,860.00, while USD faces profit-taking ahead of August US CPI data due at 12 :30 GMT.
- Investors expect core PCE to grow at a steady 0.2%, while the annual reading softens to 3.9% from 4.2% in July.
- A softer-than-expected reading for the Fed’s preferred inflation gauge may raise traders’ bets that interest rates will remain unchanged for the rest of the year.
- Recently, the odds of interest rates remaining stable at 5.25%-5.50% dropped as Fed policymakers made hawkish comments and durable goods orders rose surprisingly in August.
- On Wednesday, Minneapolis Federal Reserve President Neel Kashkari stated that he is not sure the central bank has raised rates enough to reduce core inflation to 2%.
- Meanwhile, Richmond Federal Bank President Thomas Barkin advocated a “wait and see” approach, as a likely government shutdown could complicate the Fed’s ability to assess the state of the economy due to the possible interruption of economic data publications.
- US durable goods orders for August unexpectedly rose 0.2% versus expectations for a 0.5% decline. In July, orders suffered a sharp contraction of 5.6%. The US manufacturing PMI has been in contraction for 10 months. Even so, optimistic capital goods order data has improved the sector’s outlook.
- According to CME Group’s Fedwatch tool, the odds of interest rates holding steady at 5.25%-5.50% at the November policy meeting have recovered to 83% from 77% on Thursday. Traders see a 66% chance that interest rates will remain unchanged for the remainder of the year, up from 58% on Thursday.
- Although the recovery in energy prices could have a temporary impact on US inflation, rising home rents could keep inflation stagnant. The Fed’s Barkin said Thursday that housing will be key to continuing progress toward moderating inflation in the coming quarters, with the risk that rising home prices will also boost rental markets.
- The Dollar Index (DXY) faces selling pressure near a new 10-month high at 106.80 as the risk aversion theme loses momentum. Still, the odds of a recovery are high, as the US economy appears to be managing higher interest rates while other economies are struggling.
- The US economy has shown a resilient labor market, household demand and declining inflation. However, according to PMI data, the manufacturing sector has been in constant contraction for 10 months.
- Following the US consumer price index data, investors will focus their attention on the September manufacturing PMI report, which will be published on Monday by the Institute for Supply Management (ISM).
- The US manufacturing PMI is forecast to improve to 47.8 from 47.6 in August, but will remain below the 50.0 threshold, which signals a contraction in activity. It would be the eleventh consecutive month of contraction.
Technical Analysis: Gold price is trading within Thursday’s range
Gold price finds provisional support after printing a new six-month low below $1,860.00. The four-day streak of losses in the price of Gold appears to have stopped, but for a sustained recovery the asset has to regain the crucial resistance at $1,900.00. The overall trend remains bearish, as the 20-day and 200-day exponential moving averages (EMA) have crossed downwards. Oversold momentum oscillators also support the precious metals recovery.
Central Banks Frequently Asked Questions
What does a central bank do?
Central Banks have the fundamental mandate of guaranteeing price stability in a country or region. Economies constantly face inflation or deflation when the prices of certain goods and services fluctuate. A constant rise in the prices of the same goods means inflation, a constant fall in the prices of the same goods means deflation. It is the central bank’s job to keep demand in line by adjusting its interest rate. For the largest central banks, such as the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
What does a central bank do when inflation is below or above the expected target?
A central bank has an important tool to raise or lower inflation: modify its reference interest rate. At pre-communicated times, the central bank will issue a statement with its reference interest rate and give additional reasons why it maintains or modifies it (cuts or raises it). Local banks will adjust their savings and loan rates accordingly, which in turn will make it harder or easier for citizens to make a profit on their savings or for companies to borrow and invest in their businesses. When the central bank substantially raises interest rates, we speak of monetary tightening. When you reduce your reference rate, it is called monetary easing.
Who decides monetary policy and interest rates?
A central bank is usually politically independent. Members of the central bank’s policy council go through a series of panels and hearings before being appointed to a position on the policy council. Each member of that council usually has a certain conviction about how the central bank should control inflation and the subsequent monetary policy. Members who want a very loose monetary policy, with low rates and cheap loans, to substantially boost the economy, while settling for inflation slightly above 2%, are called “doves.” Members who prefer higher rates to reward savings and want to control inflation at all times are called “hawks” and will not rest until inflation is at 2% or just below.
Is there a president or head of a central bank?
Typically, there is a chair who leads each meeting, has to create a consensus between the hawks and the doves, and has the final say when votes need to be divided to avoid a 50-50 tie on whether to adjust current policy. The president will give speeches, which can often be followed live, in which he will communicate the current monetary stance and outlook. A central bank will try to push its monetary policy forward without causing wild swings in rates, stocks, or its currency. All central bank members will channel their stance toward markets ahead of a monetary policy meeting. A few days before a monetary policy meeting is held and until the new policy has been communicated, members are prohibited from speaking publicly. This is what is called the blocking period.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
