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- Gold price gains ground near $2,045 despite the recovery of USD.
- US Nonfarm Payrolls (NFP) came in better than expected, rising 216K in December vs. 173K prior.
- Traders will closely monitor the US Consumer Price Index (CPI), due on Thursday.
Gold price (XAU/USD) holds positive ground despite the rebound of the US Dollar (USD) during the early Asian session on Monday. The stronger-than-expected US labor data on Friday has boosted Greenback demand. Nonetheless, this week’s inflation data will be very important. At press time, the gold price is trading at $2,045, gaining 0.06% for the day.
Meanwhile, the US Dollar Index (DXY), a measure of the value of the USD against a weighted basket of currencies used by US trade partners, rebounds from its late December low to 102.50, up 0.04% on the day.
The US inflation data for December will be the highlight. The headline Consumer Price Index (CPI) is expected to show an increase of 3.2% YoY, while the Core CPI is projected to ease to 3.8% YoY from 4.0% in the previous reading. If the data comes in strong, this could lift the Greenback and weigh on the USD-denominated gold.
On Friday, US Nonfarm Payrolls (NFP) came in better than expected, growing 216K in December versus 173K prior. Elsewhere, the Unemployment Rate was steady at 3.7% in the same period, above the market consensus of 3.8%. The Average Hourly Earnings rose to 4.1% YoY in December from 4.0% in the previous reading. Traders lower their bets on interest rate cuts from the Federal Reserve (Fed). According to the CME Fedwatch tool, the Fed funds futures markets have priced in 56% odds of a March rate cut from the Fed.
Looking ahead, the US inflation data, as measured by the Consumer Price Index (CPI) will be released on Thursday. On Friday, the Chinese CPI and the US Producer Price Index for December will be due. Furthermore, many Fed officials are set to speak this week, including Bostic (Monday), Barr (Tuesday), Williams (Wednesday), and Kashkari (Friday).
The Federal Reserve (Fed) Bank of Richmond President Thomas Barkin said on Friday that the labor market in the United States is moving in a very steady softening pattern and is unlikely to reaccelerate at this point.
Key quotes
“Consumer demand remains healthy, though slowing.”
“Labor market reacceleration at this point seems unlikely.”
“There is more uncertainty around the path of inflation given that progress over the last six months has been so reliant on goods.”
“Companies still trying to raise prices; need to see how consumers and competitors react.”
“The first quarter will be important given that businesses tend to mark up at the start of the year.”
“Labor market is 'normalizing nicely’.”
“No problem 'toggling' rate to more normal levels as you build confidence inflation is falling.”
Market reaction
The US Dollar Index (DXY) is trading unchanged on the day at 102.45, as of writing.
Fed FAQs
What does the Federal Reserve do, how does it impact the US Dollar?
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.
How often does the Fed hold monetary policy meetings?
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.
What is Quantitative Easing (QE) and how does it impact USD?
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.
What is Quantitative Tightening (QT) and how does it impact 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.
- AUD/USD trades weaker around 0.6712 amid the USD rebound.
- US Nonfarm Payrolls rose 216K, beating expectations; the Unemployment Rate was unchanged at 3.7%.
- Fed funds futures markets are pricing in 56% odds of a Federal Reserve (Fed) rate cut.
- Australian monthly Retail Sales for November and the US Consumer Price Index (CPI) for December will be in the spotlight this week.
The AUD/USD pair trades on a softer note above the 0.6700 mark during the early Asian session on Monday. The recovery of the US Dollar (USD) from its late December low drags the AUD/USD lower. Investors await the US Consumer Price Index (CPI) this week for fresh impetus. This figure could trigger the volatility of the pair in the near term. The pair currently trades near 0.6712, down 0.03% on the day.
The US Bureau of Labor Statistics (BLS) revealed on Friday that the December Nonfarm Payrolls (NFP) rose 216K from the previous reading of 173K, stronger than the 170K expected. Meanwhile, Average Hourly Earnings climbed 0.4% MoM and 4.1 YoY in December. Finally, the Unemployment Rate was unchanged at 3.7%, suggesting the economy is still some way from recession.
In response to the data, the Fed funds futures markets lower the odds of a March rate cut from the Federal Reserve (Fed) to about 56%, according to the CME Group. The Fed officials released interest rate projections at their December meeting, indicating that they expect three quarter-percentage points of rate cuts in 2024. Nonetheless, the markets anticipate the Fed to be more aggressive, with futures traders pricing in up to six cuts.
On the other hand, market players will monitor the Australian monthly Retail Sales for November on Tuesday, which is estimated to show an increase of 1.2% after contracting 0.2% in October. The figure might convince the Reserve Bank of Australia (RBA) policymakers to keep interest rates elevated for longer.
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