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- Gold price prints a fresh five-month low as upside risks to inflation emerge
Gold price prints a fresh five-month low as upside risks to inflation emerge
- Gold price refreshes five-month low under $1,900 as US Dollar strengthens.
- Resilience in the United States economy will keep inflationary pressures stubborn.
- Atlanta Fed’s GDPNow forecast model predicts annualized Q3 growth rate of 5.8%.
Gold price (XAU/USD) remains in bearish territory on Thursday as US economic resilience underpins the US Dollar and Treasury yields. The precious metal senses the pain of rising inflation expectations due to robust consumer spending momentum. Federal Reserve (Fed) policymakers noted that while the pace of fresh payroll additions is slow, the Unemployment Rate continues to remain near historic lows and strong wage growth will keep inflation persistent.
In spite of higher borrowing costs and tight credit conditions by United States commercial banks, housing demand, and construction activities expand, and retail demand remains upbeat, which will keep Fed policymakers on their toes. Severe strength in the US Dollar is also backed by declining Gross Domestic Product (GDP) projections for China due to poor demand from households and a vulnerable housing sector.
Daily Digest Market Movers: Gold price awaits weekly jobless claims data
- Gold price finds nominal bets after printing a fresh five-month low around $1,890.00 as Federal Reserve minutes for the July meeting released on Wednesday conveyed that the central bank could raise interest rates further.
- The precious metal faces severe selling pressure amid strength in the US Dollar and higher Treasury yields. The reasoning behind the strength in the Greenback and bond yields is rising upside risks to inflation.
- 10-year US Treasury yields rose sharply to near 4.30% as the Fed remains cautious as the “last mile” of inflation seems persistent.
- In addition to stubborn inflation expectations, the US Dollar is enjoying bids as the Chinese economic outlook remains bleak.
- A rising Unemployment Rate, a slowdown in the housing sector, and weak overall demand demonstrate deflation risks in the Chinese economy, which improves the appeal of the US Dollar as a safe haven.
- Fed Minutes from July’s FOMC meeting conveyed that two policymakers favored an unchanged interest rate decision, while others supported one more interest rate hike.
- A majority of Fed policymakers remained worried about upside risks to inflation, which indicates that the job of achieving price stability is not done yet.
- No signs of victory against inflation indicate that the interest rate policy could be tightened ahead.
- Fed policymakers agreed that the level of uncertainty remained high and that future interest rate decisions would depend on the "totality" of data arriving in "coming months".
- Policymakers said that payroll additions have slowed recently, but the Unemployment Rate remains unchanged and is consistent with the objective of bringing core inflation down to 2%.
- The US economy is quite resilient due to robust consumer spending momentum, which might keep inflation elevated.
- US housing data for July released on Wednesday remained upbeat despite higher borrowing costs. Nuclear homebuilding rose by 3.9% against the forecast of 2.7%. In addition, future construction approvals rose nominally against the contraction recorded in June.
- Apart from that, monthly Industrial Production came out of contraction in June and expanded by 1.0% in July vs. estimates of 0.3%.
- Atlanta Fed’s GDPNow forecast model predicted an annualized growth rate of 5.8% for the third quarter vs. 5.0% estimate earlier. Also, Deutsche Bank increased its estimate for Q3 real Gross Domestic Product (GDP) to 3.1% from the former prediction of 1.5%.
- On Thursday, investors will focus on the weekly Jobless benefits data for the week ending August 11. The economic data is seen at 240K, lower than the previous week’s reading of 248K.
Technical Analysis: Gold price prints fresh five-month low near $1,890
Gold price delivers a fresh swing low, printing a fresh five-month low at $1,889.60 as upside risks to inflation grow amid resilience in the US economy. The precious metal trades below the 200-day Exponential Moving Average (EMA) for the third straight trading session, suggesting that bears have an upper hand. Deviation between the declining 20 and 50-day EMAs is widening further, indicating that the bearish impulse is strengthening.
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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