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- Gold price capitalizes on US Dollar’s correction as focus shifts to Jackson Hole
Gold price capitalizes on US Dollar’s correction as focus shifts to Jackson Hole
- Gold price recovers sharply, supported by Greenback’s correction as the US economy appears to lose resilience.
- US firms start to operate at lower capacity in line with a deteriorating demand environment.
- Jerome Powell at Jackson Hole might outline the benefits of higher interest rates for a longer period.
Gold price (XAU/USD) recovered confidently as the US Dollar and Treasury yields faced selling pressure after S&P Global reported weak preliminary PMI data for August. Lower factory activity and bleak service sector growth raise concerns over the resilience of the US economy and strengthen hopes of a neutral commentary from Federal Reserve (Fed) Chair Jerome Powell at the Jackson Hole Symposium.
Investors remain worried about the financials of US firms as rising interest rates and higher inflationary pressures force them to scale down their operating capacity in accordance with a deteriorating demand environment. If this situation persists, labor market conditions are likely to deteriorate.
Daily Digest Market Movers: Gold price capitalizes on lower US Yields
- Gold price continues its winning streak on Thursday as the US Dollar remains subdued and Treasury yields edged down ahead of the Jackson Hole Symposium.
- The precious metal strengthens as preliminary US PMI data for August released by S&P Global on Wednesday indicated that the economy is losing its resilience.
- The preliminary Manufacturing PMI came in at 47.0, underperforming expectations of 49.3 and July’s reading of 49.0. The Services PMI decreased to 51.0 against estimates of 52.2 and the former release of 52.3.
- Weak PMI figures signal the hit of tight monetary policy by the Fed on the economy.
- Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said: “A near-stalling of business activity in August raises doubts over the strength of US economic growth in the third quarter. The survey shows that the service sector-led acceleration of growth in the second quarter has faded, accompanied by a further fall in factory output.”
- The US central bank has raised interest rates aggressively to 5.25%-5.50% in a war against stubborn inflation. Inflation has come significantly lower to 3.2%, but investors are worried about how the Fed will reach the 2% desired rate as price pressures persist.
- Meanwhile, investors will focus on the commentary from Fed Chair Jerome Powell at the Jackson Hole Symposium.
- Jerome Powell is expected to underpin the need to keep interest rates higher for a longer period rather than opting for further tightening of the monetary policy.
- In July’s monetary policy meeting, Powell commented that more hikes were on the cards if economic data remained encouraging.
- Any comment about rate cuts by Powell at Jackson Hole will improve the risk-taking ability of market participants.
- Apart from the interest-rate guidance, the outlook on inflation and the US economy will be keenly watched.
- The US Dollar Index remains rangebound above 103.00 on Thursday after a sell-off move. On the economic data front, Durable Goods Orders for July will be published at 12:30 GMT. Orders are seen contracting by 4.0%, swinging from the 4.6% increase recorded in June.
- The 10-year US Treasury yields extended their correction to 4.19% after the PMI data suggested that the US economy is losing its resilience.
- Contrary to that, St. Louis Fed President James Bullard said the US economy faces risks of stronger growth. This could elevate the need for more interest-rate increases from the central bank to keep up the fight against inflation.
Technical Analysis: Gold price extends four-day winning spell
Gold price extends its four-day winning streak, supported by a correction in the US Dollar and Treasury yields as the PMI data prompted investors to question the resilience of the US economy. The recovery move in the precious metal pushes it above the 200-day Exponential Moving Average (EMA), suggesting that the long-term trend is turning bullish again. The yellow metal also climbs above the 20-day EMA but a closing above the same is highly required to keep the upside momentum.
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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