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Gold price extends higher as Fed’s rate adjustment campaign appears over

  • The price of Gold rises for the third consecutive session due to the moderation of US inflation.
  • The US headline CPI rose 3.2%, its slowest pace in two years.
  • Investors are awaiting US retail sales and producer prices (PPP).

The price of Gold (XAU/USD) continues its recovery, as the easing of price pressures in the US economy has reduced bets on further tightening of monetary policy by the Federal Reserve (Fed). The precious metal benefited from the slow growth of headline inflation in the US, which slowed due to the sharp drop in gasoline prices. The soft US inflation report for October indicates that the current interest rates set by the Fed are adequate to reduce inflation to 2%.

The dollar and bond yields have fallen as the low Consumer Price Index (CPI) has underpinned a boost in risk appetite. The moderation in inflation has boosted investor confidence that the Fed will cut rates soon. Later in the day, market participants will be closely watching monthly US retail sales data and the October Producer Price Index (PPI).

Daily summary of market movements: Gold price rises due to moderation in inflation

  • Gold prices aim to extend their recovery above $1,970 as the substantial decline in October inflation in the US indicates that the Federal Reserve is unlikely to raise interest rates further.
  • US inflation data for October, released on Tuesday, indicated that headline inflation slowed significantly. The annual headline CPI rose 3.2%, below estimates of 3.3% and the previous reading of 3.7%. This is the lowest growth in general inflation in more than two years.
  • The sharp drop in global oil prices caused a significant drop in the overall inflation rate.
  • Rental prices continued to rise in October, but at a slower pace than in September. Food and grocery prices increased at a higher rate, 0.3%.
  • Monthly core inflation, which excludes oil and food price volatility, rose 0.2%, compared to estimates – and September’s growth rate – of 0.3%. Annual core inflation rose 4.0%, slowing from expectations and the previous release of 4.1%.
  • Although core inflation fell more than expected, the pace of decline was nominal, indicating persistent rigidity. This remained one of the main concerns of Federal Reserve officials last week, forcing them to lean towards a further increase in interest rates.
  • Last week, Federal Reserve Chairman Jerome Powell commented that the central bank will not hesitate to tighten monetary policy even further, as failing to control inflation would be its biggest mistake.
  • Following the release of US inflation data, Federal Reserve Bank of Richmond President Thomas Barkin said at an event in South Carolina that underlying inflation was partly offset by supply shortages. .
  • Thomas Barkin added that the central bank is making real progress on inflation, but is not convinced that inflation is on a smooth path back to its 2% target (for core CPI). Barkin warned that the Fed must do more to curb demand and inflation.
  • The latest inflation figures have tipped the balance in favor of the Fed keeping interest rates unchanged in the 5.25-5.50% range. Economists expect that the Fed has ended its interest rate hikes and that discussions about an interest rate cut will move forward.
  • The Dollar Index (DXY) faced an intense sell-off following the release of the soft inflation report. The Dollar Index has returned to two-month lows near 104.00 as easing inflationary pressures accelerated risk-taking. The 10-year US Treasury yield fell sharply to 4.43%.
  • Investors will focus on monthly US retail sales data and the Producer Price Index (PPI) for October, which will be released at 13:30 GMT.
  • According to the consensus, US retail sales contracted 0.3% versus an expansion of 0.7% in September. A sharp decline in consumer spending could keep pressure on the US dollar.
  • In addition to the US economic data, US President Joe Biden’s meeting with Chinese President Xi Jinping at the White House will be the subject of close attention. The debate on the war between Israel and Palestine is eagerly awaited.
  • Gains in Gold could be limited due to risk appetite and easing tensions in the Middle East.

Technical Analysis: The price of Gold exceeds $1,970

Gold price jumps near $1,970 after the release of the soft US inflation report. The precious metal resumed its bullish path after discovering significant buying interest near the 50-day exponential moving average (EMA). Gold’s rally has extended above the 20-day trend, indicating that the overall appeal has turned extremely bullish.

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

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