- Gold price aims more upside $2,030 while the US Dollar falls from a seven-week high.
- Fed policymakers abstain from offering timing for rate cuts.
- Considering the upbeat labor market, the Fed is expected to achieve a soft landing.
Gold price (XAU/USD) aims to come out of the woods in Wednesday’s early New York session. Gold, a non-yielding asset, is both supported and capped by the fact that whilst the Federal Reserve is poised to make rate cuts, uncertainty remains over their timing. Fed policymakers are holding back from unwinding the restrictive monetary policy stance too aggressively due to the current strength in labor demand and upbeat household spending.
The US Dollar Index (DXY), which is negatively correlated to Gold price, have eased despite the fact the Fed is unlikely to cut interest rates in March – something that would usually weigh on the Gold. Even expectations for a rate cut in May have decreased significantly as the Fed lacks evidence that inflation will slow sustainably to its 2% target. Fed policymakers are worried premature action on interest rates could flare up price pressures again, cautioning that the last mile in taming price pressures is always tricky.
Meanwhile, Minneapolis Federal Reserve President Neel Kashkari said the central bank needs more months of good inflation data to attain confidence that inflation will return to the 2% target. Kashkari speculated that two or three rate cuts seem appropriate this year.
Going forward, speeches from Fed policymakers’ Richmond Federal Reserve Bank Thomas Barkin and Federal Reserve Governor Michelle Bowman will be of utmost importance.
Daily Digest Market Movers: Gold price eyes more upside as Fed sees two or three rate cuts appropriate this year
- Gold price attempts to recapture two-day high near $2,040 while investors await fresh guidance from Federal Reserve policymakers over inflation and interest rates.
- The economic indicators for January released so far have indicated that the United States is outperforming expectations, which signifies a persistent inflation outlook.
- The US economic calendar is light this week, therefore investors are focusing on speeches from Fed policymakers for fresh cues about when the central bank will begin reducing interest rates.
- The speech from Cleveland Federal Reserve Bank President Loretta Mester delivered on Tuesday indicated that deepening uncertainty over inflation is not allowing policymakers to offer any timing for rate cuts.
- Loretta Mester said a robust labor market and resilient household spending have allowed the Fed to keep interest rates restrictive, giving them time to gather evidence about inflation declining sustainably to the 2% target.
- Mester added that the Fed is looking to bring down interest rates, and the forecast of three rate cuts this year is intact.
- Philadelphia Federal Reserve Bank President Patrick Harker didn’t provide any cues about easy policy in his prepared remarks. However, he said the Fed is making “real progress” in bringing inflation down to 2%, and the path to a “soft landing” is very much in sight. A soft landing is when a central bank manages to achieve price stability without triggering a recession.
Technical Analysis: Gold price seems comfortable above $2,030
Gold price trades sideways above $2,030 amid an absence of major economic events this week, while speeches from Fed policymakers will keep investors busy. The precious metal turns sideways after a sharp recovery from a weekly low of around $2,015. The yellow metal oscillates inside Monday’s trading range for the second straight session, which indicates a sharp volatility contraction. The asset is hovering near the 20-day Exponential Moving Average (EMA), which trades around $2,033.
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-clings-to-recovery-as-us-dollar-yields-ease-fed-speeches-in-focus-202402071029