- Gold price holds onto recovery propelled by a fall in long-term US Treasury yields.
- The US Dollar strengthened after S&P Global PMIs signaled an uptick in US business activity.
- Investors await the Q3 GDP and the Fed’s preferred inflation gauge, which could influence the Fed’s November policy decision.
Gold price (XAU/USD) clings to gains around $1,970 on Wednesday, prompted by a decline in long-term US bond yields. The precious metal managed to recover swiftly as the near-term trend remains firmer amid the Israel-Palestine conflict. The risks of widening tensions in the region persist as the Israeli troops are preparing to enter Gaza. A ground assault by the Israeli army in Gaza could escalate the chances of Iran’s intervention in the ongoing conflict.
The appeal for the US Dollar improved significantly as S&P Global reported an uptick in US business activity in October despite higher interest rates and multi-year high US bond yields. Unlike Asian and European economies, the US economy seems to be handling higher borrowing costs effectively due to robust consumer spending, easing price pressures, and strong labor demand.
Daily Digest Market Movers: Gold price eyes on US data
- Gold price trades inside Tuesday’s range but holds onto recovery to near $1,970.00 prompted by a decline in long-term US bond yields.
- The near-term demand for Gold remains upbeat as the Israeli army could enter Gaza for a ground assault anytime.
- The ground attack by the Israeli troops was delayed as various nations urged for the safe dispatch of humanitarian aid for Gaza civilians.
- Meanwhile, 10-year US Treasury yields fell back to 4.83% as investors shifted their focus to the US Q3 GDP and core Personal Consumption Expenditure (PCE) price index data for September. Both indicators have the potential to affect the Federal Reserve’s (Fed) interest rate decision to be announced on November 1.
- Economists forecast that the US economy will grow by 4.2% on an annualized basis in the third quarter, against the 2.1% growth rate recorded in the second quarter.
- As per the estimates, the monthly core PCE price index expanded at a higher pace of 0.3% in September against a growth of 0.1% in August. The annual core PCE inflation is expected to grow at a slower pace of 3.7% against a 3.9% reading from August.
- An upbeat Q3 GDP report and steady core PCE inflation could propel expectations of further policy-tightening by the Fed.
- As per the CME Group Fedwatch tool, traders see the Fed keeping interest rates unchanged at 5.25%-5.50% as an almost certain outcome. The odds of one more interest rate increase in any of the two remaining monetary policy meetings in 2023 have increased to 27%.
- Fed policymakers have signaled they are willing to keep interest rates unchanged in the range of 5.25%-5.50% on November 1 as higher bond yields are sufficient to reduce overall spending and investment.
- The appeal for Golde diminished on Tuesday after S&P Global reported an uptick in the US business activity in October.
- The Manufacturing PMI reached the 50.0 threshold for the first time since November 2022. The data outperformed expectations of 49.5 and September’s reading of 49.8. The Services PMI landed at 50.9 against expectations of 49.9 and the prior release of 50.1.
- S&P Global reported that strong demand conditions drove the expansion amid a renewed increase in new orders. The agency also reported that market sentiment has improved in part due to hopes of interest rates having peaked.
- The US Dollar, tracked by the US Dollar index, recovered sharply from 105.40 as the US economy appears to be performing better while the European economy reported a downtick in business activity due to higher borrowing costs.
Technical Analysis: Gold price reverses to $1,970
Gold price trades directionless around $1,970.00 after a sharp recovery as investors await key US economic data to be released later this week. The precious metal remains firmer, on a broader note, as it is trading near a five-month high. Short-term Exponential Moving Averages (EMAs) are upward-sloping, which indicates that the overall trend is bullish. Momentum oscillators also indicate that the bullish impulse is active.
Fed FAQs
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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Source: https://www.fxstreet.com/news/gold-price-rebounds-as-us-yields-decline-amid-persistent-tensions-in-middle-east-202310250940