Gold price (XAU/USD) bounced back after gauging intermediate support near its three-week low around $1,940.00 on Wednesday. The precious metal discovers support as the impact of a decline in gold demand reported by the World Gold Council (WGC) fades and the United States Manufacturing PMI continues its contracting spell for the third quarter in a row.
A power-pack action is anticipated in the Gold price as Automatic Data Processing (ADP) will report US private employment data. The employment data will set the undertone for the interest rate decision by the Federal Reserve (Fed) for its September monetary policy meeting as labor market conditions have remained extremely tight.
Gold price finds some support after printing a fresh three-week low at around $1,940.00 ahead of key labor market data. The precious metal trades below the 20 and 50-day Exponential Moving Averages (EMAs), which indicates that the short and mid-term trend is bearish. Gold price forms a Head and Shoulders chart pattern on a lower time frame and a breakdown will occur if the asset fails to defend the neckline plotted around a fresh three-week low.
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.
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.
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.
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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