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Gold price seeks direction ahead of PMIs

  • The price of Gold is trading lower as uncertainty persists over the outlook for interest rates.
  • The Fed left interest rates unchanged but left the door open to further tightening monetary policy.
  • Unlike other G7 economies, the US remains strong thanks to the strength of the labor market and the optimism of consumer spending.

The price of Gold (XAU/USD) struggles to find direction, as investors remain uncertain about the interest rate spike following the Federal Reserve’s (Fed) monetary policy announcement on Wednesday. The precious metal is trading within Thursday’s range as gains are restricted due to the resilience of the US economy, which has kept alive expectations of a further interest rate hike by the Fed. On the downside , the price of Gold also seems well supported due to the constant decline in underlying inflation.

Although the U.S. economy has remained strong thanks to labor demand, wage growth, service sector activity and consumer spending, the country’s manufacturing sector remains a cause for serious concern. US factory activity has long been contracting, and new pressures cannot be ruled out as companies try to control costs by lowering inventories to avoid increased working capital needs.

Daily summary of market drivers: Gold price remains sideways awaiting S&P Global PMIs

  • The price of Gold rebounds and approaches $1,925, as investors see difficulties in the global economy due to expectations that central banks will keep interest rates higher for longer.
  • The precious metal attempted to rally despite resistance from the Dollar and Treasury yields as the Federal Reserve (Fed) is expected to keep interest rates unchanged for the rest of the year.
  • According to the CME’s Fedwatch tool, traders see a 71% chance of interest rates holding steady at 5.25%-5.50% at the November policy meeting.
  • However, Fed policymakers offered an aggressive interest rate outlook, hinting at a further 25 basis point (bp) rate hike, which would take interest rates to 5.50%-5.75. %.
  • Fed policymakers may continue to favor stable monetary policy as core inflation continues to fall and the recent rise in gasoline prices will likely have a limited impact on overall inflationary pressures.
  • Although the Fed’s interest rate hike is easing inflationary pressures, investors are shifting their focus to economic data, which will set the stage for upcoming monetary policy meetings.
  • US economic conditions, particularly stable employment and wage growth, as well as optimistic consumer spending, may cause excess inflation above the desired 2% rate to remain extremely high. persistent.
  • Bank of America (BofA) is optimistic about the US economic outlook due to the strong boost in consumer spending, which reduces the chances of recession.
  • In Wednesday’s policy announcement, Fed officials said the U.S. economy is facing higher borrowing costs.
  • It is in the Fed’s interest to keep interest rates high enough for longer to reduce inflation. According to its forecasts, reference rates will remain above 5% next year and will end 2025 almost at 4%. Fed members expect inflation to be under control in 2026, but interest rates are expected to be well above pre-pandemic levels.
  • US stock markets could come under pressure as higher interest rates over a longer period could dent economic growth.
  • Gains in the DXY Dollar Index remain restrained as investors await S&P Global’s preliminary manufacturing and services PMIs for September, due at 13:15 GMT.
  • The Manufacturing PMI is expected to improve marginally to 48.0 from August’s reading of 47.9. For its part, the PMI for services, a sector that represents two-thirds of the US economy, would rise to 50.6 from 50.5 in August.
  • The US manufacturing PMI has been below 50 for many months, a sign that the country’s factory activity has long been in contraction, as companies strive to achieve efficiency by controlling costs in the inventory accumulation. Producers are operating at lower capacity due to the bleak demand outlook.
  • The dollar may continue to enjoy greater appeal as other G7 economies face slowdown risks due to an inability to absorb the consequences of restrictive interest rate policy.

Technical Analysis: Gold price stabilizes above $1,920

The price of Gold recovers after a correction to around $1,915. The precious metal is trading within Thursday’s range around $1,925. The general trend is sideways amid uncertainty about the peak of interest rates. The precious metal is resting on the 200-day EMA at $1,910, exposed to further declines as investors are using pullbacks as selling opportunities.

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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