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- Gold price prepares for fresh upside as yields struggle
Gold price prepares for fresh upside as yields struggle
- Gold price prepares to extend upside ahead of US PMI data.
- Fed’s Barkin hopes that the US recession will be “less severe”.
- Strength in Gold prices has come from restrictive upside in US Treasury yields.
Gold price (XAU/USD) strengthens this week as the rally in US Treasury yields halts amid fading hopes of more interest-rate increases from the Federal Reserve (Fed). US headline Consumer Price Index (CPI) has come down to 3.2% from its peak of 9.1% due to an aggressive rate-tightening cycle, but the Fed will likely have to keep interest rates higher for a longer period as the remaining excess inflation above the desired rate of 2% seems extremely stubborn.
In his commentary at the Jackson Hole Symposium, Fed Chair Jerome Powell is expected to explain the benefits of keeping rates higher for longer and he is also likely to avoid supporting further policy-tightening in the absence of encouraging economic data. Before the Jackson Hole event, investors will keep an eye on preliminary S&P Global PMI data, which will be released at 13:45 GMT.
Daily Digest Market Movers: Gold price awaits Jackson Hole event for further action
- Gold price consolidates marginally above $1,900, supported by sluggish US Treasury Yields ahead of the Jackson Hole Economic Symposium.
- 10-year US Treasury Yields dropped below 4.30% as Fed Chair Jerome Powell is not expected to explicitly refer to further policy-tightening at the Jackson Hole event.
- Richmond Fed Bank President Thomas Barkin said the recent moves in bond yields are not a sign of inappropriate market tightening but rather likely a response to strong economic data.
- About the interest rate guidance, Thomas Barkin said if inflation remains high and signs of a drop in demand remain absent. The situation will force the need of tighter monetary policy.
- Fed Barkin further added that the recession situation in the US economy will be “less-severe’’.
- Investors expect Powell will suggest that interest rates are likely to remain higher for a longer period so that inflation can return to 2%.
- Apart from the interest rate guidance, investors will also focus on the labor market and the inflation outlook.
- Market participants expect that Fed policymakers will have to spend more blood and sweat to shred the ‘last mile’ of inflation, which is the remaining path towards the desired rate of 2%. Therefore, the Fed is expected to keep interest rates higher for longer.
- On Wednesday, investors will focus on the preliminary S&P Global PMI data for August, which will be published at 13:45 GMT.
- According to estimates, the Manufacturing PMI is expected to increase to 49.3 in August from 49.0 in July. The Services PMI is seen declining slightly to 52.2 from 52.3 a month earlier.
- After the preliminary S&P Global PMI, investors will shift their focus to the Durable Goods Orders for July, which will be released on Thursday at 12:30 GMT. Orders are expected to contract by a sharp 4.0%. In June, Durable Goods Orders expanded by 4.6%.
- The US Dollar Index (DXY) delivers a solid break above the crucial resistance of 103.70 as investors continue to flush liquidity due to strong US economic resilience.
- Meanwhile, the US bank regulator Federal Deposit and Insurance Corporation (FDIC) will propose new rules overhauling how large regional banks are prepared for a potential failure on August 29. US bank regulators are worried about potential risks due to rising borrowing costs.
- US National Security Adviser Jake Sullivan said on Tuesday that US Commerce Secretary Gina Raimondo will travel to China next week with a message that the US is not seeking to decouple from China, reported Reuters.
Technical Analysis: Gold price delivers three-day positive closing
Gold price attempts to deliver a break of the consolidation formed in a range of $1,885-1,900 in the past week. The precious metal rebounds after hitting a fresh five-month low near $1,885.00. However, the broader bias is still favoring the downside due to strengthening US Treasury yields. Despite a three-day recovery, the yellow metal struggles around the 200-day Exponential Moving Average (EMA). Declining 20 and 50-day EMAs indicate a bearish mid-term trend.
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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