- Gold climbs to $2016.30, driven by US inflation surpassing forecasts, signaling ongoing price pressure.
- The diminished likelihood of imminent Fed rate cuts enhances Gold’s allure as the USD has weakened since last Tuesday.
- The decline in US Treasury and real yields underpin Gold’s surge with a rising TIPS yield reflecting higher safe-haven demand.
Gold price extended its gains for three consecutive days after last week’s economic data from the United States (US) revealed that inflation remains above the US Federal Reserve’s (Fed) target. The Consumer Price Index (CPI) and the Producer Price Index (PPI) in January exceeded the consensus, catching traders off guard, which trimmed the odds for a Fed rate cut in March and May. That sponsored a leg-up in the Greenback (USD), which has remained on the defensive since last Tuesday. The XAU/USD exchanges hands at $2016.30.
Traders seeking protection turned to the yellow metal following the latest inflation reports. Additionally, the fall in US Treasury bond yields, particularly the 10-year note that hit a year-to-date (YTD) high of 4.332%, retraced four basis points to 4.293%. Consequently, real yields, which correlate negatively with Gold prices, fell from around 2.04% reached on Wednesday to 1.950%, as reflected by the yield on the US 10-year Treasury Inflation-Protected Securities (TIPS) yield.
Daily digest market movers: Gold advanced despite investors pushing back Fed rate cuts to June
- The CME FedWatch Tool sees traders expect the first 25 bps rate cut by the Fed in June 2024.
- As of today, investors are pricing in 97 basis points of easing throughout 2024.
- The latest inflation reports from the US triggered a change of language from Fed officials, who struck a “cautious” tone. Atlanta Fed President Raphael Bostic suggested the Fed is in no rush to ease policy, saying the Fed could be patient.
- In regard to that, San Francisco Fed President Mary Daly stated, “We will need to resist the temptation to act quickly when patience is needed and be prepared to respond agilely as the economy evolves.”
- This week, the US economic schedule will feature the release of the latest Federal Reserve Open Market Committee (FOMC) Minutes alongside Fed officials’ speeches beginning on Wednesday.
- Traders will get further cues from US S&P Global PMIs, Initial Jobless Claims data and the Chicago Fed National Activity Index, usually a prelude to the Institute for Supply Management (ISM) Manufacturing PMI.
Technical Analysis: Gold stays above 100-day SMA, eyes key resistance near $2,030
Gold´s daily chart portrays the non-yielding metal as neutral to downwardly biased despite staying above the 200-day Simple Moving Average (SMA) at $1,965.46. If buyers would like to regain control, they must challenge the 50-day SMA at $2,032.71. Once cleared, the next stop would be $2,050, ahead of the latest cycle high at $2,065.60.
On the flip side, if sellers step in and push prices below the $2,000 figure, that will expose the 100-day SMA at $1,998. The next stop would be the December 13 low at $1,973.13, followed by the 200-day SMA at $1,965.47.
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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