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- Gold price weakens as US recession fears recede
Gold price weakens as US recession fears recede
- Gold price hits a four-day low as the US Dollar strengthens.
- US wage growth slows as workers become more reluctant to switch jobs frequently.
- Hopes for a soft landing are boosted as the US Unemployment Rate rose sharply to 3.8%.
Gold price (XAU/USD) consolidates its downward trend as the US Dollar remains resilient due to bearish market sentiment and steady employment growth in the US. The yellow metal faces pressure as the Federal Reserve (Fed) will likely keep interest rates higher for a longer period. The appeal for the US Dollar improves significantly as the US economy is expected to avoid a recession due to easing inflation and a stable job market.
US wage growth slowed in August as employees appear to be sticking to their current jobs due to declining confidence in the job market. After last week’s data pointed to stable job growth, slower wage growth, and broadly steady factory activity investors shifted their focus to the ISM Services PMI for August, which will be released on Wednesday. The PMI is expected to be broadly steady at 52.6 as demand for services remains resilient.
Daily Digest Market Movers: Gold price edges down on US Dollar strength
- Gold price corrects below the five-day consolidation formed in a range between $1,939 and $1,945 even though the broader bias remains positive as investors hope that the Federal Reserve is done hiking interest rates.
- According to the CME Group FedWatch Tool, there is a 60% chance that interest rates will remain unchanged at 5.25%-5.50% by year-end.
- The precious metal remains sideways due to holiday-thinned trade. US markets were closed on Monday on account of Labor Day.
- Hopes for the Fed’s soft landing were boosted on Friday as data showed that the US Unemployment Rate rose sharply to 3.8% and wage growth slowed in August, which adds to signs of a cooling labor market.
- Recent data suggests that US workers avoid switching jobs as frequently as in recent months, a sign of less confidence in the labor market. Still, Wage growth remains higher for those employees who switch jobs than for those who stay.
- Slower wage growth, and thus lower money for disposal, would slow down consumer spending momentum and ease more heat from sticky inflation.
- The US Dollar Index (DXY) hits a three-month high above 104.50. The USD looks supported by still strong labor market data in August, offsetting the fact that the Manufacturing PMI remained below the 50.0 threshold for a tenth straight month.
- In spite of significantly easing hawkish Fed bets, the US Dollar remains resilient as fears of a recession in the US economy have receded.
- Analysts at Goldman Sachs see a 15% chance that the US economy will slide into a recession as inflation cools down and job growth remains solid. Earlier, expectations of a recession in the US economy were at 20%.
- Cleveland Fed Bank President Loretta Mester said on Friday that demand and supply in the labor market is coming into a better balance but the job market is still strong. She further added that while job growth has slowed and job openings are down, the Unemployment Rate is low.
- Factory Orders data for July will remain in focus. Orders are seen contracting by 0.1% on month. In June, new orders expanded by 2.3%. The manufacturing ISM data showed last week that firms cut spending on inventory build-up and focused on improving margins.
- This week, the major focus will be on the ISM Services PMI for August, which will be published on Wednesday. The PMI is expected to be broadly steady at 52.6.
- Investors expect that the Fed will keep interest rates steady in September but the US central bank is likely to keep the doors open for further policy tightening. Investors remain mixed about whether the Fed will discuss rate cuts.
Technical Analysis: Gold price refreshes four-day low
Gold price refreshes a four-day low after a breakdown of the consolidation formed in a range of $1,939-$1,945 as the US Dollar Index extends its upside trend. The precious metal falls to near the 50-day Exponential Moving Average (EMA) at $1,932.00. Still, it remains above the 20-day EMA, which indicates that the short-term trend is bullish.
The Relative Strength Index (RSI) struggles to climb into the bullish range of 60.00-80.00. If the index does reach these levels, it will activate the bullish impulse.
US Dollar FAQs
What is the US Dollar?
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
How do the decisions of the Federal Reserve impact the US Dollar?
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
What is Quantitative Easing and how does it influence the US Dollar?
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
What is Quantitative Tightening and how does it influence the US Dollar?
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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