Gold price capitalizes on neutral Fed bets
- Gold price extends winning spell as investors see the Fed keeping interest rates on hold.
- The Fed is expected to announce an unchanged interest rate decision amid falling inflation and upbeat economic prospects.
- Worries about an economic slowdown due to “higher interest rates for longer” linger despite the US economic resilience.
Gold price (XAU/USD) continues to attract bids ahead of the Federal Reserve (Fed) interest rate decision, which will be announced on Wednesday. The yellow metal extended its three-day winning spell on Tuesday as the Fed is expected to maintain the status quo on the grounds of falling inflation and an upbeat economic outlook.
Investors remain curious about the guidance on interest rates as a hawkish outlook would trigger a risk-aversion theme. Markets are pricing in that the Fed is done with hiking rates until year-end, and hopes for the US economy shifting on a “golden path” are high. The only factor that could keep expectations of one more interest rate increase is rising energy prices, which may contribute to inflation and further squeeze households’ real incomes.
Daily Digest Market Movers: Gold price climbs further on neutral Fed bets
- Gold price extends its upside momentum above $1,930 as investors see the Federal Reserve keeping interest rates unchanged at 5.25%-5.50% after its September monetary policy meeting. The decision will be announced on Wednesday.
- The precious metal kept attracting bids from the past three trading sessions as the upside in the US Dollar is expected to remain restricted on expectations of unchanged rates.
- US inflation is falling and the labor market is resilient despite higher interest rates, allowing policymakers to leave interest rates unchanged.
- The recent rise in Oil prices is exerting pressure on inflation but Fed policymakers generally consider core inflation, which doesn’t include energy prices, while framing monetary policy.
- For the interest rate guidance, the Fed is expected to keep the doors open for further policy tightening to ensure price stability.
- The Fed could keep interest rates elevated long enough to bring down inflation to 2%. This is likely to continue to build pressure on the US economy, particularly for the manufacturing and housing sectors.
- Any discussion about rate cuts would improve the appeal for the risk-perceived assets and dampen the US Dollar. Economists at Goldman Sachs expect Fed officials to signal a full percentage point of cuts next year but to keep expectations of one more interest rate increase this year to a range of 5.50%-5.75%.
- Worries about an economic slowdown due to higher interest rates for longer linger despite the current economic resilience. Shorter-term US Treasury yields have surpassed the yields offered in longer time frames, a situation that has historically indicated risks of a potential recession.
- As per the CME Group Fedwatch Tool, traders undoubtedly see interest rates remaining steady at 5.25%-5.50% after the Federal Open Market Committee (FOMC) meeting on Wednesday. For the rest of the year, traders anticipate almost a 58% chance for the Fed to also keep monetary policy unchanged.
- About the US economic outlook, US Treasury Secretary Janet Yellen on Monday said that she doesn’t see any signs that the economy will enter into a downturn as inflation is coming down and the labor market is quite strong.
- However, Yellen warned that a failure by Congress to pass the legislation to keep the government in control could elevate the risk of an economic slowdown.
- Later this week, investors will watch the preliminary Manufacturing and Services PMI September data to be reported by S&P Global. US factory activity has remained vulnerable due to higher interest rates. Firms are focusing on achieving efficiency by controlling costs in a deteriorating demand environment.
- The US Dollar Index (DXY) seems well-supported above the crucial 105.00 level. Investors keep pumping money into the USD Index due to deepening fears of a global slowdown in a high-interest rate environment.
Technical Analysis: Gold price shifts above 20 and 50-EMAs
Gold price resumes its three-day winning spell as the Fed is expected to keep the monetary policy unchanged on Wednesday. The precious metal is at a two-week high at around $1,935.00 after discovering buying interest near the 200-day Exponential Moving Average (EMA), which trades at around $1,910.00. The yellow metal has climbed above the 20-day and 50-day EMAs, which indicates that the short-term trend has turned bullish.
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.