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Gold Price Plunges as Fed’s Dovish Tilt Boosts US Dollar

  • Gold retreats on its way towards $2,300 after reaching a daily high of $2,326.
  • The Fed’s revised projections show only one rate cut in 2024, a headwind for XAU/USD prices.
  • Lower producer prices and rising jobless claims boost USD, 10-year Treasury yield falls to 4.242%.

Gold prices fell during the North American session on Thursday after reaching a daily high of $2,326. The Federal Reserve (Fed) projects only one interest rate cut instead of the three proposed since the December 2023 Summary of Economic Projections (SEP), also known as the dot chart. Meanwhile, mixed US economic data boosted the dollar to the detriment of the gold metal.

XAU/USD is trading at $2,303, down almost 1%. US data from the Bureau of Labor Statistics (BLS) showed lower prices paid by producers, while the number of Americans filing for unemployment benefits exceeded estimates and the previous reading.

Although the numbers suggest the Fed could lay the groundwork for lowering interest rates, Fed officials estimate only 25 basis points (bps) of easing by the end of 2024, according to the dot chart.

Despite that, according to data from the Chicago Board of Trade, market participants are seeing 39 basis points of easing through the December 2024 federal funds rate contract.

The yield on the 10-year US Treasury bond fell seven bps from 4.310% to 4.242%, generally a tailwind for the non-yielding metal that is feeling the pause in Chinese gold buying.

News that the People’s Bank of China paused its 18-month bullion buying streak weighed on the precious metal. PBoC holdings remained stable at 72.80 million troy ounces of Gold in May.

On Wednesday, Fed Chair Jerome Powell stated that they are less confident about inflation than previously “to cut.” He added, “If jobs weaken unexpectedly, the Fed is ready to respond.” When asked about the US CPI report, Powell mentioned that he is just one and emphasized the need to see the deflation process evolving towards the Fed’s goal.

Daily movements and market drivers: Gold price falls after softer US data

  • The US Dollar Index (DXY) rose 0.49% to 105.20, a headwind for Gold prices.
  • The US Producer Price Index (PPI) in May fell from 0.5% to -0.2%, missing estimates for a 0.1% expansion.
  • Core PPI in May was unchanged at 0%, below forecasts for a 0.3% expansion and down from 0.5% in April.
  • Initial jobless claims for the week ending June 6 rose by 242,000, above the consensus of 225,000 and the previous week’s reading of 229,000.
  • Even though the US CPI report showed that the disinflation process continues, Fed Chairman Jerome Powell commented that they remain “less confident” about progress in inflation.
  • Although the latest US CPI and PPI reports were weaker than expected, the latest NFIB survey for May showed that companies are struggling with higher prices and access to cheap financing.

Technical Analysis: Gold price sellers regain control as prices head towards $2,300

Gold price remains neutral to bearish bias as the Head and Shoulders chart pattern remains in place, suggesting the unyielding metal’s price is primed for further losses. Momentum as measured by the RSI shows that sellers are in charge, an indication that once the XAU/USD price falls below $2,300, lower prices are on the way.

Gold’s first support would be $2,300. Once cleared, the next stop would be the May 3 low of $2,277, followed by the March 21 high of $2,222. More losses lie ahead as sellers would target the Head and Shoulders chart pattern target around $2,170 to $2,160.

On the other hand, if XAU/USD surpasses the June 7 cycle high of $2,387, that would pave the way to test the $2,400 figure.

The Fed FAQs

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.

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.

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.

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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