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The price of Gold remains on the rise thanks to the neutrality of the outlook for interest rates

  • The price of Gold finds support while Fed officials do not see an interest rate hike in September.
  • The DXY Dollar Index is approaching 105.00, preparing for a further rise amid risk-off sentiment.
  • The Fed’s Austan Goolsbee said the central bank aims to push the economy on a “golden path.”

The price of Gold (XAU/USD) rebounds significantly on Friday, as Federal Reserve (Fed) officials suggested that the central bank will not raise interest rates further at the September monetary policy meeting. The precious metal takes advantage of the statements of the Fed officials, which seem supported by the cooling of inflation and the slowdown in employment growth.

Meanwhile, the dollar remains very attractive as fears of a global economic crisis remain high. The DXY Dollar Index is hovering around five-month highs and hopes for further gains remain strong. For the Gold price, significant action will come after the release of US Consumer Price Index (CPI) data for August, which is scheduled for next week. Analysis of the jobs and inflation report will provide significant clues to the Fed’s interest rate decision for its September policy meeting.

Market drivers: The price of Gold consolidates in a context of weakness of the Dollar

  • Gold price finds buying interest near $1,915 and recovers above Thursday’s high around $1,924 as bullish momentum in the Dollar begins to run out.
  • The precious metal attracted fresh buying when Federal Reserve officials issued neutral comments on September interest rate policy on Thursday.
  • Dallas Fed President Lorie Logan said it “may be appropriate” to skip an interest rate hike at the September meeting, but warned that further tightening could be necessary to reduce inflation to 2%.
  • New York Fed President John Williams said there is no urgency to raise interest rates this month as inflation is falling and the economy is more balanced. However, Williams kept options open to keep interest rates higher for longer.
  • On the labor market outlook, Williams said demand for labor is declining and the unemployment rate could rise to the 4% range.
  • The Fed’s Beige Book, released on Wednesday, indicated that labor growth remained subdued. The report also showed that the economy grew at a modest pace in recent weeks and inflationary pressures eased.
  • Although the Fed survey indicates that labor market conditions are slowing, economic data indicates that overall employment conditions remain strong.
  • Unit Labor Costs for the April-June quarter soared to 2.2%, ahead of expectations and a first quarter reading of 1.6%. Decent wage growth defies signs of cooling inflation as it could bolster consumer spending momentum.
  • On Thursday, the U.S. Department of Labor reported that people filing for unemployment benefits for the first time fell to 216,000 in the week ending Sept. 1, down from the 234,000 expected and the previous release of 229,000. . Claims for jobless benefits fell below expectations for the third consecutive week, suggesting that demand for labor could strengthen again.
  • Chicago Fed President Austan Goolsbee stated that the central bank’s goal is to push the economy toward a “golden path,” that is, a situation in which inflation recedes without triggering a recession.
  • Following neutral comments from Fed policymakers, the odds of interest rates remaining unchanged at 5.25%-5.50% for the remainder of the year rose to 55% from 53% previously.
  • Meanwhile, the DXY Dollar Index remains below the immediate resistance of 105.00, as investors focus their attention on US inflation data for August, due next week.
  • Before that, investors will also focus on inflation data from China. Deflation risks in China would strengthen the attractiveness of the US dollar.
  • The dollar has been taking advantage of the potential risks of global economic turmoil. European and Asian economies face the wrath of rising interest rates.
  • The US Senate confirmed World Bank economist Adriana Kugler to the Fed Board of Governors.

Technical Analysis: The price of Gold oscillates above $1,920

Gold price stabilizes above the $1,920 support after recovering from a weekly low of $1,916. The precious metal is attempting to move above the 20-day EMA around $1,925, while the 50-day EMA continues to decline. Momentum oscillators indicate that the overall trend is sideways. The 200 EMA continues to act as support for the Gold bulls.


What does a central bank do?

Central banks have a key mandate to ensure price stability in a country or region. Economies constantly face inflation or deflation when the prices of certain goods and services fluctuate. A constant rise in the prices of the same goods means inflation, a constant fall in the prices of the same goods means deflation. It is the central bank’s job to keep demand in line by adjusting its interest rate. For the largest central banks, such as the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

What does a central bank do when inflation is below or above the expected target?

A central bank has an important tool to raise or lower inflation: modify its reference interest rate. At pre-communicated times, the central bank will issue a statement with its reference interest rate and give additional reasons why it maintains or modifies it (cuts or raises it). Local banks will adjust their savings and loan rates accordingly, which in turn will make it harder or easier for citizens to make a profit on their savings or for companies to borrow and invest in their businesses. When the central bank substantially raises interest rates, we speak of monetary tightening. When you reduce your reference rate, it is called monetary easing.

Who decides monetary policy and interest rates?

A central bank is usually politically independent. Members of the central bank’s policy council go through a series of panels and hearings before being appointed to a position on the policy council. Each member of that council usually has a certain conviction about how the central bank should control inflation and the subsequent monetary policy. Members who want a very loose monetary policy, with low rates and cheap loans, to substantially boost the economy, while settling for inflation slightly above 2%, are called “doves.” Members who prefer higher rates to reward savings and want to control inflation at all times are called “hawks” and will not rest until inflation is at 2% or just below.

Is there a president or head of a central bank?

Typically, there is a chairperson who leads each meeting, has to create a consensus among the hawks or doves, and has the final say when votes need to be divided to avoid a 50-50 tie on whether to adjust current policy. The president will give speeches, which can often be followed live, in which he will communicate the current monetary stance and outlook. A central bank will try to push its monetary policy forward without causing wild swings in rates, stocks, or its currency. All central bank members will channel their stance toward markets ahead of a monetary policy meeting. A few days before a monetary policy meeting is held and until the new policy has been communicated, members are prohibited from speaking publicly. This is what is called the silent period.

Source: Fx Street

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