Gold price (XAU/USD) rebounds on Tuesday after printing a fresh five-month low below $1,890.00, capitalizing on a mild correction in the US Dollar. The precious metal recovers as investors seem confident that the Federal Reserve (Fed) is not planning to raise interest rates further but also admit that rate cuts are unlikely to be under discussion this year.
The US economy continues to remain resilient as the country’s labor market is extremely tight. Fed Chair Jerome Powell is likely to provide guidance on interest rates and the economic outlook in his speech at the Jackson Hole Economic Symposium. It will be worth watching whether Jerome Powell mentions the possibility of a recession due to restrictive monetary policy. On the economic data front, Durable Goods Orders data for July will be watched this week.
Gold price delivers a two-day consolidation breakout and jumps to near the round-level resistance of $1,900. The precious metal strengthens as the US Dollar fails to extend a rally, providing a level field ahead of the Jackson Hole Symposium. The yellow metal rebounds after printing a fresh five-month low of around $1,885.00, but still trades below the 200-day Exponential Moving Average (EMA), which indicates that the long-term trend is bearish.
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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