Gold price (XAU/USD) consolidates near a six-day low and remains exposed to more falls as investors keep funding the US Dollar due to an infirm global economy. The precious metal fails to capitalize on a widely anticipated unchanged interest rate decision by the Federal Reserve (Fed), which will be announced on September 20. Meanwhile, investors await Q2 US Unit Labor Costs data, which will be published at 12:30 GMT.
With economies like the UK and the Eurozone struggling due to tight monetary policy and high inflationary pressures and China facing deflation risks, the US economy remains resilient. The US economy is expected to avoid recession as inflation starts cooling due to the strict interest rate policy by the Fed, while job growth and consumer spending remain broadly stable.
Gold price consolidates below the crucial support of $1,920.00 amid resilience in the US Dollar due to downbeat market sentiment. The precious metal remains under pressure after failing to sustain above the 20-day and 50-day Exponential Moving Averages (EMAs). The yellow metal is declining toward the 200-day EMA, which trades around $1,910.00. Momentum oscillators indicate a lackluster performance ahead amid uncertainty about the interest rate outlook.
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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