Gold price surrenders gains as investors await Fed policy announcement for further guidance.
Fears of a recession in the US economy trim amid a tight labor market and softening inflation.
The US Dollar Index’s upside looks restricted as investors have digested July’s interest-rate hike.
Gold price (XAU/USD) turns subdued as the upside in the US Dollar Index gets elevated. The precious metal drops sharply as market participants focus on the interest rate decision by the Federal Reserve (Fed) due Wednesday. An interest-rate hike of 25 basis points (bps) looks certain, but the catalyst that is haunting investors’ sentiment is the guidance about future rate hikes and discussions about rate cuts.
The US Dollar Index struggles to climb among the immediate resistance of 101.40 as recession fears have eased. In light of tight labor market conditions and easing inflationary pressures, the odds of a recession have faded to some extent. Declining inflation would offer relief to the Fed, which could opt to avoid raising interest rates further and even consider rate cuts sooner than expected.
Daily Digest Market Movers: Gold remains under pressure ahead of Fed policy
Gold consolidates around $1,960.00 after a recovery move as investors turn anxious ahead of the Federal Reserve’s interest-rate decision.
As per the CME Group Fedwatch tool, investors are certain that an interest-rate hike of 25 bps will be announced, which will push rates to the 5.25%-5.50% range.
In spite of a bigger-than-expected decline in headline and core inflation in June, an interest-rate hike from the Fed looks almost certain in order to return inflation confidently to 2%.
Investors expect that July’s interest-rate hike will be the last one in the current tightening cycle.
Fed Chair Jerome Powell reiterated in his testimony that two more interest rate hikes are appropriate.
The Fed isn’t likely to consider rate cuts this year as the major decline in inflation is the outcome and effects of lower global oil prices.
The United States manufacturing sector failed to come out of the contraction territory. The preliminary Manufacturing PMI for July landed at 49.0, higher than expectations and the former release of 46.3. A figure below 50.0 signals a contraction in factory activity.
The services PMI remained in the expansion area, but failed to match expectations. The index came in at 52.4, lower than the consensus of 54.0 and June’s figure of 54.4.
S&P Global said on Monday that New US light vehicle sales volumes are set to rise again in July as easing supply-chain snags help automakers ramp up production to meet pent-up demand, Reuters informed.
This week, the US economic calendar is full of economic events as the Fed policy will be followed by second-quarter Gross Domestic Product (GDP) data and June’s Durable Goods Orders.
Preliminary GDP is expected to expand at a slower pace of 1.7% while the first-quarter GDP pace was recorded at 2.0%.
Softening GDP projections indicate the consequences of aggressive policy tightening by the Fed.
The upside in the US Dollar Index (DXY) seems restricted around 101.40 as a survey by the National Association for Business Economics survey (NABE) showed that 71% of respondents anticipated 50% or fewer chances of a recession in the US economy. In the prior survey, almost half of the respondents anticipated 50% or fewer chances of a recession.
The reasoning behind a decline in recession fears is the strong labor market and softening inflation metrics.
Technical Analysis: Gold remains below $1,960.00
Gold price fails to sustain a recovery move after facing stiff barricades around $1,964.00. The precious metal demonstrates a directionless performance after a recovery move as investors have sidelined ahead of the interest-rate decision by the Fed. Gold price found strength as the 20-day Exponential Moving Average (EMA) is confidently crossing the 50-day EMA, which strengthens the upside bias. Oscillators still lack momentum, signaling that the downside pressure has not entirely faded.
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.