Gold price (XAU/USD) remained subdued on Thursday as a stickier US inflation report for August confused investors about further direction. The precious metal strives for a decisive move as the market hopes that the impact of higher headline inflation due to rising gasoline prices remains limited to the headline Consumer Price Index (CPI). The US Dollar demonstrates a volatility compression after a slightly hot inflation report failed to prompt hawkish Federal Reserve (Fed) bets.
After the US inflation report, investors shifted their focus to the Producer Price Index (PPI) and consumer spending data for August, which will solve the interest rate puzzle further. The current restrictive interest rate cycle has failed in denting labor demand and consumer spending significantly, but the market remains worried that a “higher for longer” rate context could dampen the broader picture ahead.
Gold price hovers near a three-week low, marginally above the crucial support of $1,900. The precious metal struggles to discover bids as the inflation report for August indicates upside risks to headline inflation due to rising gasoline prices. The yellow metal fails to sustain above the 200-day Exponential Moving Average (EMA), which trades at around $1,910.00. The declining 20 and 50 EMAs portray a bearish short-term trend.
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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