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- Gold price falls back as Greenback strengthens ahead of Manufacturing PMI
Gold price falls back as Greenback strengthens ahead of Manufacturing PMI
- Gold price comes under pressure amid weaker demand due to higher interest rates.
- Investors anticipate a power-pack action in Gold amid the release of the United States Manufacturing PMI for July.
- Fed Goolsbee favors more interest-rate hikes from Fed despite easing inflation.
Gold price (XAU/USD) faced immense selling pressure while attempting to sustain above the crucial resistance of $1,970.00 on Tuesday. The precious metal senses pressure as gold demand remained weak in the first half of 2023 due to higher gold prices and an aggressive rate-tightening cycle by the Federal Reserve (Fed). Apart from that, the immense strength of the Greenback builds severe pressure on bullion.
Investors anticipate a power-pack action in the Gold price amid the release of the United States Manufacturing PMI for July. The US factory sector has been consistently contracting for the past eight months and a similar result is expected again. After the hangover of US factory activities, investors will shift to labor market data, which will set an undertone for the Fed’s September monetary policy. For now, the chances of an interest rate hike from the Fed in its September policy are lower.
Daily Digest Market Movers: Gold price awaits factory activity data
- Gold price drops sharply after facing selling pressure around $1,970.00 as demand for gold remains weak due to higher gold prices and interest rates.
- Higher interest rates by central banks pushed households to elevate deposits to banks rather than investing in bullion.
- Fears of more interest rate hikes from the Federal Reserve (Fed) deepen as Chicago Fed Bank President Austan Goolsbee favors further policy tightening despite easing inflationary pressures.
- Minneapolis Fed Bank President Neel Kashkari remained positive that inflation is coming down positively but showed concerns about easing labor market conditions due to an aggressive policy-tightening cycle.
- The US Dollar Index continues its three-day winning spell and prints a fresh three-week high at 102.14 as a pause in the rate-tightening spell by the Fed is still out of sight.
- Meanwhile, 10-year US Treasury yields remain subdued around 3.96% as inflation remains in check after soft United States core Personal Consumption Expenditure (PCE) data was released on Friday.
- A power-pack action is expected in the US Dollar on Tuesday as the US Institute of Supply Management (ISM) agency will report July’s Manufacturing PMI data.
- Manufacturing PMI is seen higher at 46.5 vs. June’s figure of 46.0. In spite of higher factory activities, the Manufacturing sector is expected to remain in a contracting phase. Investors should note that a figure below 50.0 is considered contracting and this would be the ninth contraction print in a row.
- In addition to the Manufacturing PMI, investors will focus on Factory Orders which are expected to drop sharply to 44.0 against the previous month’s print of 45.6.
- Investors would get some meaningful cues about labor demand through JOLTS Job Openings data for June, which will be released at 14:00 GMT. As per expectations, Job Openings would drop to 9.62M against May’s release of 9.824M.
- This week, the US Dollar Index will remain active as the US economic calendar is full of economic events. After US Manufacturing PMI, investors will focus on Services PMI and labor market data.
- On Wednesday, Automatic Data Processing (ADP) will report Employment Change data for the US, which will be published at 12:15 GMT. As per the consensus, the US economy added a fresh 188K payrolls in July, significantly lower than novel employment additions of 497K made in June.
- Upbeat labor market conditions would make more interest-rate hikes from the Fed warranted.
- Fed survey data released on Monday showed that US banks reported tighter credit standards and weaker loan demand from both businesses and consumers during the second quarter, Reuters reported.
Technical Analysis: Gold price forms a Head and Shoulder pattern
Gold price trades inside Monday’s range as investors await crucial economic data for further action. The precious metal demonstrates a squeeze in volatility but will start expanding after economic events. The yellow metal is constantly trading sideways around the 20-day Exponential Moving Average (EMA) around $1,955.00.
On a smaller time frame, the Gold price is forming a Head and Shoulder chart pattern, which indicates that a bearish reversal is underway.
Fed FAQs
What does the Federal Reserve do, how does it impact the US Dollar?
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
How often does the Fed hold monetary policy meetings?
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
What is Quantitative Easing (QE) and how does it impact USD?
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck 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 in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
What is Quantitative Tightening (QT) and how does it impact 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 principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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