Gold slumps on fading Middle East tensions, Kashkari, Bowman support for more rate hikes

  • Gold price struggles to recover as investors turn cautious ahead of Fed Powell’s speech.
  • On Tuesday, a majority of Fed policymakers supported raising interest rates further.
  • Economists see cracks in the broader appeal for the US Dollar amid easing labor market conditions.

Gold price (XAU/USD) struggles for a firm footing as investors remain worried about guidance on interest rates ahead of remarks from Federal Reserve (Fed) Chair Jerome Powell’s speech on Wednesday. The precious metal remains under pressure as Fed policymakers have supported further policy-tightening in their recent statements, emphasizing that the battle against stubborn inflation is far from over.

Fed policymakers Michelle Bowman and Neel Kashkari delivered hawkish guidance on interest rates on Tuesday, citing worries about inflation remaining persistent due to the resilience of the US economy. On the contrary, Chicago Fed President Austan Goolsbee remained confident about inflation easing, adding that discussions over how far interest rates should be hiked should move towards and how long interest rates should remain high.

Daily Digest Market Movers: Gold price faces pressure as US Dollar gains traction

  • Gold price finds intermediate support after printing a fresh two-week low below $1,960.00. The downside risks for Gold are persistent as investors await Federal Reserve Chair Jerome Powell’s remarks about the interest rate outlook, which are scheduled for Thursday.
  • Investors will keenly watch whether Jerome Powell advocates for raising interest rates further or will say that the current monetary policy is sufficiently restrictive.
  • The precious metal faces pressure as investors rush to buy the  US Dollar amid caution that Fed policymakers could lean towards raising interest rates one more time to ensure price stability.
  • US Fed Governor Michelle Bowman declared support for further policy-tightening to ensure the return of consumer inflation to 2% in a timely manner. Bowman added that the monetary policy appears to be restrictive and some tightening in financial conditions has been contributed by higher bond yields.
  • Michelle Bowman further added that there is unusually high volatility regarding the economy and Middle East conflict.
  • Minneapolis Fed President Neel Kashkari reiterated the need to do more work to avoid inflation ticking up again. Kashkari added that the labor market is robust and he is not seeing any meaningful evidence that the economy is weakening.
  • Contrary to Michelle Bowman and Neel Kashkari, Chicago Fed President Austan Goolsbee said that the central bank is making significant progress in bringing down inflation. Kashkari also said he sees a decline in inflation in the next two months.
  • Over the interest rate outlook, Austan Goolsbee said that the moment of arguing how high the policy rate should fade to how long the central bank should keep rates at this level as inflation is coming down, as reported by Reuters.
  • Dallas Fed Bank President Lorie Logan didn’t comment on the interest rate outlook, in her statement on Tuesday, but warned that inflation is excessively high despite a recent decline in inflation.
  • Lorie Logan acknowledged a minor easing in labor demand while the broader job market is upbeat. She remained cautioned about repeating energy shocks that could significantly disrupt the economy and impact near-term inflation expectations.
  • In spite of Fed policymakers favoring further policy tightening to ensure price stability, bets for interest rates remaining unchanged in the range of 5.25%-5.50% till the end of 2023 are high. As per the CME Group Fedwatch tool, traders see a 90% chance for interest rates remaining unchanged till the year-end.
  • The US Dollar Index (DXY) gathers strength for a fresh upside above the immediate resistance of 105.80 as investors remained cautious ahead of Fed Powell’s speech while the broader outlook worsened as cracks started appearing in US employment.
  • On the global front, Middle East tensions continue to act as a cushion for bullions. The war between Israel and Palestine is seen escalating as the Israeli troops have initiated attacking Hamas tunnels in Gaza.

Technical Analysis: Gold price struggles for stability above $1,960

Gold price turns sideways after searching an interim support below $1,960.00 as investors await Powell’s speech for further action. The precious metal oscillates inside Tuesday’s trading range but a range extension is widely anticipated after Powell’s guidance by the Fed in its December monetary policy meeting. 

On a daily time frame, the yellow metal has found support near the 20-day Exponential Moving Average (EMA) after correcting from above $2,000. Momentum oscillators indicate that the bullish momentum has faded.

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-remains-on-tenterhooks-ahead-of-fed-powell-speech-202311080955