- Gold price gains strong positive traction and breaks a four-day losing streak to a nearly seven-month low.
- The fall in US bond yields takes the dollar away from its 10-month highs and provides support for the yellow metal.
- Expectations of a further Fed rate hike in 2023 could limit gains, as traders await the release of the US core PCE price index.
The price of Gold (XAU/USD) has been trending downward since the beginning of the current week and on Thursday fell to its lowest level since March 10, around the $1,858-$1,857 area. However, declining US Treasury yields dragged the US Dollar (USD) lower for the second day in a row, away from the high reached on Wednesday, and helped the yellow metal gain some positive traction on Friday and break a four-day losing streak. The fall of the Dollar could also be attributed to the repositioning before the publication of the US PCE price index.
The PCE index, which is the Fed’s preferred inflation indicator, will influence expectations about the next monetary policy move, which in turn will boost the Dollar and give a new directional boost to the price of Gold, which does not generate returns. Meanwhile, the looming US government shutdown on October 1, which poses a risk to the economy, along with lingering concerns over China’s weakened real estate sector, lend additional support to the safe-haven yellow metal.
However, it remains to be seen whether the intraday positive move in the price of Gold is backed by genuine buying or turns out to be a short-covering bounce in the wake of growing acceptance that the Federal Reserve (Fed) will maintain its hawkish stance. . Last week, the US central bank warned that it could raise rates again in 2023 as US inflation remains very persistent. Therefore, a stronger inflation reading, coupled with US economic resilience, will reaffirm the Fed’s expectations and trigger aggressive selling around the yellow metal.
Daily summary of market drivers: The price of Gold recovers from its multi-month low in a context of repositioning pending the US PCE.
- US 10-year Treasury yields retreated from a 16-year high and drags the US dollar away from the yearly high.
- The impasse over Republican demands to drastically cut public spending raises the risk of a US government shutdown.
- House Republicans have rejected fiscal 2024 spending levels set in a deal between House Speaker Kevin McCarthy and President Joe Biden in May 2023.
- The Democratic-led U.S. Senate moved forward with a bipartisan bill to extend federal spending through Nov. 17.
- Growing concerns about slowing Chinese growth and a slumping real estate market continue to weigh on investor sentiment.
- The US economy grew at an annualized rate of 2.1% during the second quarter and reaffirms bets on at least one more Fed rate hike by the end of the year.
- Richmond Fed President Thomas Barkin said Thursday that it was unclear whether further changes to monetary policy would be necessary in the coming months.
- Markets’ attention remains focused on the crucial US PCE price index, which will influence expectations about the Fed’s future rate hike path.
- The core PCE price index is expected to rise 0.2% MoM in August. However, the annual rate is expected to slow from 4.2% to 3.9% during the reporting month.
Technical Analysis: Gold Price Could Have Difficulty Breaking Above $1,900
From a technical perspective, the Relative Strength Index (RSI) on the daily chart is showing oversold conditions and is leading traders to lighten their bearish positions on the price of Gold ahead of key risk data. That said, it would be wise to wait for buying beyond the previous day’s high around the $1,880 area before positioning for further upside. XAU/USD could then accelerate the momentum and try to reclaim the $1,900 level. Such an area should act as a strong barrier, which if breached will suggest that the downtrend witnessed over the last week has ended.
On the other hand, the $1,864 area could protect the immediate decline before the multi-month low, around the $1,858-$1,857 area touched on Thursday. If this support is not defended, the price of Gold could then become vulnerable and accelerate the fall towards the next relevant support near the $1,820 area. The bearish trajectory could extend further towards the $1,800 level.
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.
