- Gold price drops to a near two-week low as investors channel funds into the US Dollar and bond yields rise.
- Geopolitical tensions stay more or less unchanged fading the appeal of Gold.
- Fed’s Kashkari acknowledges the need for more work to control inflation.
Gold price (XAU/USD) drops further as safe-haven demand diminishes amid no further escalation in geopolitical tensions. A recovery in the US Dollar and long-term bond yields further weigh on the precious metal.
The downside move in Gold, however, may be short-lived as investors see an end to the Federal Reserve’s (Fed) rate-tightening campaign, due to gradually easing consumer inflation and higher Treasury yields, which have tightened financial conditions significantly.
Commentary from Federal Reserve Chairman Jerome Powell on Wednesday could drive further action in the US Dollar and bond markets. Powell may give an idea of whether investors should expect more interest rate hikes this year to ensure a return of inflation to the Fed’s 2% target.
Fed Governor Lisa Cook said that the current interest rate policy is sufficiently restrictive to achieve price stability on Monday; Fed’s Kashkari, on the other hand, reportedly said the opposite in a Wall Street Journal article published on the same day.
Fed Kashkari spoke again on Tuesday that if inflation starts to tick back up, that would tell me Fed’s job is not yet done.” He added that labor market is robust and is not seeing any meaningful evidence that the economy is weakening.
Daily Digest Market Movers: Gold price loses shine as US Dollar revives
- Gold price extends correction to near $1,956.00 amid a recovery in the US Dollar and bond yields as Federal Reserve policymakers line up to give guidance on inflation and interest rates this week.
- Gold price fades on an absence of significant escalation in Middle East tensions.
- Israeli Prime Minister Benjamin Netanyahu has allowed entry of humanitarian aid to and the exiting of hostages from Gaza, but rejected a general ceasefire. Geopolitical tensions would keep broader demand for Gold intact.
- The US Dollar Index (DXY) discovered buyers’ interest marginally below the crucial support of 105.00 after commentary from Minneapolis Fed Bank President Neel Kashkari. The commentary from Kashkari indicated that he is leaning towards raising interest rates further.
- Kashkari commented that the economy is performing well despite higher interest rates. He added that the central bank has much work to do to ensure price stability.
- Contrary to Kashkari, Fed Governor Lisa Cook said the current monetary policy is adequate to bring down inflation to 2%. Cook commented that the US financial system is healthy enough to tackle economic challenges.
- The Fed kept interest rates unchanged in the 5.25-5.50% last week for the second time in a row on expectations that higher US bond yields are significantly tightening financial conditions, slowing overall demand and price pressures.
- The correction in Gold could conclude sooner and a revival is highly likely as investors hope that the Fed is done with hiking interest rates.
- A slowdown in labor demand and a decline in the Services PMI has cemented hopes that interest rates won’t be hiked further.
- As per the CME Fedwatch tool, traders see an 85% chance for interest rates remaining unchanged till the year-end.
- Meanwhile, 10-year US Treasury yields managed to attain a firm footing near 4.60% as investors shifted focus to the speech from Fed Chair Jerome Powell, scheduled for Wednesday.
- Powell is expected to provide guidance on the requirement of more interest rate hikes to ensure the achievement of price stability or a time period for which rates will remain elevated and some glimpse into the performance of the economy in the fourth quarter of 2023.
- Before Powell, speeches from other Fed policymakers: Christopher Waller and John C. Williams will be keenly watched.
Technical Analysis: Gold price slips below $1,960
Gold price extends downside marginally below $1,970.00 after several failed attempts of stabilization above the psychological resistance of $2,000. The precious metal is exposed to the 20-day Exponential Moving Average (EMA), which trades around $1,960.00. The broader trend is still bullish as the 200-day EMA is sloping higher. Momentum oscillators demonstrate that the bullish momentum has faded.
Interest rates FAQs
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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