- Gold price recovers as the FOMC minutes have strengthened prospects of rate cuts this year.
- The market participants are still worried about the timing of rate cuts from the Fed.
- Further action in bullions and the US Dollar will be guided by the US Employment data.
Gold price (XAU/USD) bounces back as prospects of rate cuts from the Federal Reserve (Fed) have strengthened after the release of the Federal Open Market Committee (FOMC) minutes. While uncertainty about when exactly the Fed will announce a rate cut decision has impacted the broader appeal of the Gold price.
Meanwhile, robust economic prospects of the United States economy could force Fed policymakers to delay the announcement of a rate cut than what market participants have forecasted despite their concerns about policy over-tightening.
The US Institute of Supply Management (ISM) reported a sharp increase in Manufacturing PMI to 47.4 against expectations of 47.1 and the former reading of 46.7. The factory data however remained below the 50.0 threshold for the straight 14th month, which itself indicates contraction but an outperformance indicates that overall production is coming back on track.
Going forward, investors should be prepared for a sheer volatility as the US Nonfarm Payrolls (NFP) report is due for release on Friday.
Daily Digest Market Movers: Gold price delivers a pullback move while US Dollar corrects
- Gold price rises after sensing buying interest near $2,030 as uncertainty over rate cuts this year dissolves while the timing element is still vague.
- The FOMC minutes released on Wednesday indicated that Fed policymakers are worried about overtightening of the monetary policy.
- In the latest projections, the Fed sees three rate cuts or interest rates reducing by 75 basis points (bps) this year.
- The absence of cues about when exactly the central bank will start trimming interest rates has slightly impacted prospects of rate cuts from March.
- As per the CME Fedwatch tool, chances in favour of rate cut in March by 25 bps to 5.00-5.25% have dropped to 66.5%.
- Discussions about rate cuts from Fed policymakers indicate that underlying price pressures are clearly returning to the 2% target and they are confident of achieving price stability without pushing the economy into a recession.
- The US Dollar Index corrects after printing a fresh two-week high at 102.70 as one thing becomes clear in investors’ minds – that the Fed will be the early adopter of a rate-reduction cycle among the Group of Seven economies. 10-year US Treasury yields drop sharply to near 3.91%.
- The market mood, however, could be volatile ahead amid uncertainty regarding the US NFP report and the ISM Services PMI for December, which will be released on Friday.
- But before that, investors will focus on the US Automatic Data Processing (ADP) Employment Change data for December, which will be published at 13:15 GMT. The market participants have projected private payrolls at 115K, slightly higher than the prior reading of 103K.
Technical Analysis: Gold price aims a mean-reversion to 20-EMA
Gold price has delivered a mean-reversion move to near the 20-period Exponential Moving Average (EMA), which trades around $2,050 on a two-hour scale. The precious metal witnessed a steep fall after a breakdown below the support zone placed around $2,055, which is going to act as a resistance ahead.
The Relative Strength Index (RSI) (14) is demonstrating a range shift move from 60.00-80.00 to 20.00-60.00 in which the 60.0 region will act as a ceiling for the Gold price bulls.
On a daily time frame, the Gold price finds support after taking a cushion from the 20-day EMA, which trades around $2,040. This indicates that the overall demand for the Gold price has not faded yet.
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.
Source: https://www.fxstreet.com/news/gold-price-rebounds-as-ball-shifts-to-us-employment-datas-court-202401041036