- Gold price plunges for the second straight session as investors see Fed rate cut after spring.
- Robust demand for workers has tampered Fed rate-cut bets.
- The outlook for the US dollar and bond yields has improved significantly.
Gold price (XAU/USD) continues to face a sell-off in Monday’s late European session due to upbeat United States Nonfarm Payrolls (NFP) data for January. Investors see the Federal Reserve (Fed) keeping interest rates unchanged in March’s monetary policy meeting in the range of 5.25%-5.50% as robust labor market data has strengthened the argument for maintaining higher interest rates till Spring ends.
Strong labor demand and higher wage offerings by US employers to retain or hire workers indicate a bright demand outlook. This has also indicated a persistent inflation environment, and therefore, interest rates must remain higher to prevent further escalation.
Meanwhile, Minneapolis Federal Reserve Bank President Neel Kashkari delivered hawkish guidance on the monetary policy in the early New York session on Monday. Kashkari said a higher neutral rate means the monetary policy may be as tight as thought. However, he warned about rising delinquency costs.
While the Gold price has come under pressure, the outlook for US bond yields and the US Dollar Index (DXY) has improved significantly. The USD Index has recaptured the 104.00 resistance for the first time in two months. Meanwhile, the US Institute of Supply Management (ISM) Services PMI for January focuses on representing the service sector, which accounts for two-thirds of the economy.
Daily Digest Market Movers: Gold price plummets ahead of US ISM Services PMI data
- Gold price extends its downside below $2,020 as the latest employment data has tampered bets in favor of early rate cuts by the Federal Reserve.
- The CME FedWatch tool shows that a rate-cut move in the March policy meeting is out of the picture now, while bets for May are still meaningful.
- The labor demand remained upbeat, and wage growth accelerated robustly in January, indicating a stubborn inflation outlook.
- The upbeat employment data has strengthened Fed policymakers’ argument supporting interest rates remaining higher for somewhat longer than market expectations.
- On Friday, the United States Bureau of Labor Statistics (BLS) reported that payrolls increased by 353K in January, almost doubled from the consensus of 180K, and remained higher from upwardly revised December’s figures of 333K.
- Average Hourly Earnings grew strongly by 0.6% against expectations of 0.3% and the prior increase of 0.4%. The annual wage growth was higher by 4.5% vs. the estimated 4.1% and the former reading of 4.4%. Annual Average Hourly Earnings for December were revised from 4.1% to 4.4%.
- Unlike other Group of Seven economies struggling to maintain steady labor market conditions, the US economy is outperforming with a strong gap, allowing Fed policymakers to emphasize maintaining the “higher interest rates” narrative at least for the first half of this year.
- On Friday, Fed Governor Michelle Bowman said the recent decline in price pressures is encouraging but cautioned about early rate cuts. She warned that premature rate cuts could delay the decline in price pressures toward the 2% target, which could force policymakers to raise interest rates again.
- Meanwhile, the USD Index has printed a fresh seven-week high at 104.20 ahead of the US ISM Services PMI for January, which will be published at 15:00 GMT.
- Investors anticipate that Services PMI increased to 52.0 from 50.6 in December.
Technical Analysis: Gold price declines below $2,020
Gold price delivers a steep downside move as investors see a rate cut by the Fed delayed to May. The outlook for the precious metal has dampened as it has failed to sustain the breakout of the Symmetrical Triangle chart pattern formed on a daily time frame. The yellow metal has dropped below the 20 and 50-day Exponential Moving Averages (EMAs), which hover near $2,033 and $2,022 respectively.
The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00, which indicates a lackluster move ahead.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
Source: https://www.fxstreet.com/news/gold-price-tumbles-as-fed-rate-cut-hopes-recede-202402051022