- The price of Gold consolidates in a tight range near $2,030, while the US Dollar falls from seven-week highs.
- Fed policymakers refrain from offering a timetable for rate cuts.
- Given the optimism in the labor market, the Fed is expected to achieve a soft landing.
The price of Gold (XAU/USD) remains in a modestly tight range above $2,030 in the London session on Wednesday. Gold, a non-yielding asset, is both supported and constrained by the fact that, although the Federal Reserve is prepared to make rate cuts, there remains uncertainty over its timing. Fed policymakers are refraining from easing tight monetary policy too aggressively due to the current strength in labor demand and optimistic household spending.
The US Dollar Index (DXY) and bond yields, which are negatively correlated with the price of Gold, have fallen even though the Fed is unlikely to cut interest rates in March, something that would normally weigh on Gold. Even expectations of a rate cut in May have diminished significantly, as the Fed lacks evidence that inflation will slow sustainably to its 2% target. Fed officials worry that premature action on interest rates could trigger price pressures again, and they warn that the last mile in controlling price pressures is always difficult.
Looking ahead, speeches by Thomas Barkin of the Federal Reserve Bank of Richmond and Michelle Bowman, Governor of the Federal Reserve, will be of paramount importance.
Daily summary of market movements: Gold price clings to recovery as dollar declines and yields correct
- The price of Gold is consolidating in a tight range around $2,030, while investors await new guidelines from those responsible for the Federal Reserve on inflation and interest rates.
- The January economic indicators released so far indicate that the United States is exceeding expectations, implying a persistent inflation outlook.
- The US economic calendar is light this week, so investors are focusing on speeches from Fed officials for new clues about when the central bank will begin cutting interest rates.
- Cleveland Federal Reserve President Loretta Mester's speech on Tuesday indicated that growing uncertainty about inflation does not allow policymakers to offer a timetable for lowering rates.
- Loretta Mester said that the strength of the labor market and the resilience of household spending have allowed the Fed to keep interest rates restrictive, giving them time to gather evidence on the sustained decline in inflation to the 2% target.
- Mester added that the Fed intends to lower interest rates, and that the forecast for three rate cuts this year remains intact.
- Federal Reserve Bank of Philadelphia President Patrick Harker gave no hints about expansionary monetary policy in his speech. However, he said the Fed is making “real progress” in reducing inflation to 2%, and that the path to a “soft landing” is very much in sight. A soft landing occurs when a central bank manages to stabilize prices without triggering a recession.
Technical Analysis: Gold price seeks stability above $2,030
The price of Gold is trading sideways above $2,030 amid a lack of major economic developments this week, while speeches from Fed policymakers will keep investors busy. The precious metal turns sideways after a strong recovery from a weekly low around $2,015. The yellow metal oscillates within Monday's trading range for the second consecutive session, indicating a sharp contraction in volatility. The Asset is hovering around the 20-day exponential moving average (EMA), which is trading around $2,033.
Frequently asked questions about the Fed
What does the Federal Reserve do and how does it affect the dollar?
The monetary policy of the United States is directed by the Federal Reserve (Fed). The Fed has two mandates: achieving price stability and promoting full employment. Your main tool to achieve these objectives is to adjust interest rates.
When prices rise too quickly and inflation exceeds the Federal Reserve's 2% target, it raises interest rates, raising borrowing costs throughout the economy. This translates into a strengthening of the US Dollar (USD), as it makes the United States a more attractive place for international investors to place their money.
When inflation falls below 2% or the unemployment rate is too high, the Federal Reserve can lower interest rates to encourage borrowing, which weighs on the greenback.
How often does the Federal Reserve hold monetary policy meetings?
The Federal Reserve (Fed) holds eight meetings a year, in which the Federal Open Market Committee (FOMC) evaluates the economic situation and makes monetary policy decisions.
The FOMC is made up of twelve Federal Reserve officials: the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the eleven presidents of the regional Reserve banks, who serve for one year on a rotating basis.
What is Quantitative Easing (QE) and how does it affect the USD?
In extreme situations, the Federal Reserve can resort to a policy called Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit into a clogged 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 of 2008. It involves the Fed printing more dollars and using them to buy high-quality bonds from financial institutions. QE usually weakens the US dollar.
What is Quantitative Tightening (QT) and how does it affect 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 capital of the maturing bonds it has in its portfolio to buy new bonds. It is usually positive for the value of the US Dollar.
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.
