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Gold takes advantage of the Fed’s neutral bets

  • The price of Gold extends its bullish streak, as investors believe that the Fed will maintain interest rates.
  • The Fed is expected to announce a decision on unchanged interest rates amid falling inflation and optimistic economic prospects.
  • Despite the resilience of the US economy, concerns remain about an economic slowdown due to “higher interest rates for longer.”

The price of Gold (XAU/USD) continues to attract bids ahead of the Federal Reserve’s (Fed) interest rate decision, due to be announced on Wednesday. The yellow metal extended its three-day winning streak on Tuesday as the Fed is expected to maintain the status quo amid falling inflation and an optimistic economic outlook.

Investors remain curious about the Fed’s guidance on interest rates, as a risk-appetite outlook would trigger a tendency toward risk aversion. Markets assume the Fed will not raise interest rates further until the end of the year, and hopes are high that the US economy will shift to a “golden path.” The only factor that could maintain expectations of a further rise in interest rates is rising energy prices, which could contribute to inflation and further reduce real household incomes.

Daily summary of market movements: Gold price continues to rise thanks to the Fed’s neutral bets

  • Gold price extends bullish momentum above $1,930 as investors expect the Federal Reserve to keep interest rates unchanged at 5.25%-5.50% following its September policy meeting. The decision will be announced on Wednesday.
  • The precious metal has continued to attract bids over the past three trading sessions, as the Dollar’s rise is expected to remain capped by expectations of unchanged rates.
  • US inflation is falling and the labor market is holding up despite rising interest rates, allowing policymakers to leave interest rates unchanged.
  • The recent rise in oil prices is putting pressure on inflation, but Fed policymakers typically take into account underlying inflation, which does not include energy prices.
  • In terms of interest rate guidance, the Fed is expected to keep the doors open to further tightening of policy to ensure price stability.
  • The Fed could keep interest rates high long enough to reduce inflation to 2%. This is likely to continue to put pressure on the US economy, particularly in the manufacturing and housing sectors.
  • Any discussion of rate cuts would improve the attractiveness of risk assets and dampen the dollar. Economists at Goldman Sachs expect Fed officials to signal a full percentage point of cuts next year, but to maintain expectations for one more interest rate hike this year in a range of 5.50%-5.75%.
  • Concerns about an economic slowdown due to higher interest rates for longer persist despite the current economic resilience. Shorter-term US Treasury yields have outperformed those offered on longer maturities, a situation that has historically signaled risks of a possible recession.
  • According to CME Group’s Fedwatch tool, traders certainly see interest rates holding steady at 5.25%-5.50% following Wednesday’s Federal Open Market Committee (FOMC) meeting. For the rest of the year, traders predict a nearly 58% chance that the Fed will also keep its monetary policy unchanged.
  • Regarding the US economic outlook, Treasury Secretary Janet Yellen stated on Monday that she sees no signs that the economy will enter a recession, as inflation is declining and the labor market is quite strong. .
  • However, Yellen warned that if Congress does not pass legislation to maintain government control, the risk of an economic slowdown could rise.
  • Later this week, investors will be watching preliminary September manufacturing and services PMI data from S&P Global. US factory activity has remained vulnerable due to rising interest rates. Companies are focusing on achieving efficiency by controlling costs in an environment of deteriorating demand.
  • The Dollar Index (DXY) appears to be well supported above the crucial 105.00 level. Investors continue to pour money into the DXY due to growing fears of a global slowdown in a high interest rate environment.

Technical Analysis: Gold price moves above the 20 and 50 EMAs

Gold price resumes its three-day winning streak as the Fed is expected to keep monetary policy unchanged on Wednesday. The precious metal is at two-week highs around $1,935.00 after discovering buying interest near the 200-day EMA, which is trading around $1,910.00. The yellow metal has risen above the 20-day and 50-day EMAs, indicating that the short-term trend has turned bullish.

Inflation FAQ

What is Inflation?

Inflation measures the rise in prices of a representative basket of goods and services. General inflation is usually expressed as a month-on-month and year-on-year percentage change. Core inflation excludes more volatile items, such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the target level of central banks, which are mandated to keep inflation at a manageable level, typically around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the variation in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage of inter-monthly and inter-annual variation. Core CPI is the target of central banks as it excludes food and fuel volatility. When the underlying CPI exceeds 2%, interest rates usually rise, and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually translates into a stronger currency. The opposite occurs when inflation falls.

What is the impact of inflation on currency exchange?

Although it may seem counterintuitive, high inflation in a country drives up the value of its currency and vice versa in the case of lower inflation. This is because the central bank will typically raise interest rates to combat higher inflation, attracting more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Gold was once the go-to asset for investors during times of high inflation because it preserved its value, and while investors often continue to purchase gold for its safe haven properties during times of extreme market turmoil, this is not the case. most of the time. This is because when inflation is high, central banks raise interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity cost of holding Gold versus an interest-bearing asset or placing money in a cash deposit account. On the contrary, lower inflation tends to be positive for Gold, as it reduces interest rates, making the shiny metal a more viable investment alternative.

Source: Fx Street

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