Gold price (XAU/USD) demonstrates a rangebound performance as investors await Federal Reserve (Fed) Chair Jerome Powell's speech at the Jackson Hole Symposium for further guidance. The precious metal is expected to remain on tenterhooks as the market mood remains uncertain as to whether Jerome Powell will deliver hawkish interest rate guidance or discuss the benefits of keeping interest rates unchanged for a longer period. Market participants would also like to know how much longer the Fed will keep interest rates elevated.
Fed policymakers: Boston Fed Bank President Susan Collin and Philadelphia Fed Bank President Patrick Harker commented on Thursday that the current interest rate level is enough to do the required job. The US economy is still resilient due to a tight labor market and easing inflation, but further policy-tightening by the Fed could dampen market sentiment.
Gold price demonstrates a volatility contraction phase above $1,910.00 ahead of the Jackson Hole Symposium. The precious metal struggles to continue its five-day winning spell amid a recovery in US Treasury yields. The yellow metal tussles with resistance to climb above the 20-day Exponential Moving Average (EMA) around $1,915.00 but has broken confidently above the 200-day EMA.
The Relative Strength Index (RSI) (14) has climbed into the 40.00-60.00 range, which indicates that the bearish impulse has faded.
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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