- Gold price remains under pressure as the US economy remains resilient despite higher interest rates.
- The US economy is comfortably absorbing the consequences of the Fed’s higher interest rates.
- Fed’s Collins says further policy tightening is not off the table.
Gold price (XAU/USD) trades back and forth as uncertainty over the interest rate outlook by the Federal Reserve (Fed) deepened. The upside in the precious metal remains restricted as Fed policymakers continue to maintain a hawkish stance for upcoming monetary policy meetings. The US Dollar has also demonstrated a volatility contraction plot, but the broader trend remains bullish due to the resilient US economy.
Investors turn cautious about the US economic outlook as the Fed vowed to keep interest rates sufficiently restrictive over the longer term to get inflation under control. This could elevate the Unemployment Rate, slow labor demand, and make factory activities more vulnerable. This week investors will focus on US Durable Goods Orders data and the Fed’s preferred inflation gauge for August.
Daily Digest Market Movers: Gold price remains soft as Fed Collins support more rate hike
- Gold price juggles around $1,920, stays inside Friday’s range, as uncertainty grows over the interest rate outlook by the Federal Reserve.
- Investors remain baffled about the Fed’s interest rate outlook due to US economic resilience.
- The US economy has been absorbing the consequences of higher interest rates by the Fed effectively.
- Market participants hope that the US economy is on a golden path, where inflation recedes without impacting growth. This situation is allowing the Fed to hold interest rates unchanged.
- Stable labor demand, steady wage growth, and robust consumer spending momentum demonstrate strength in the US economy, while a contracting Manufacturing PMI is still a concern.
- S&P Global reported on Friday that a preliminary Manufacturing PMI for September improved to 48.9 from expectations of 48.0 and August’s reading of 47.9. Services PMI, which tracks a sector that accounts for two-thirds of the US economy, dropped to 50.2 from the estimates of 50.6 and the 50.5 figure in August.
- Fed policymakers confirmed that interest rates will remain lofty for a longer period until the achievement of price stability. About the interest rate projections, policymakers see benchmark rates staying above 5% next year and ending 2025 at almost 4%. Fed members expect inflation to be under control in 2026, but interest rates are expected to be well above pre-pandemic levels.
- As per the CME Fedwatch tool, traders see a 71% chance for interest rates remaining steady at 5.25%-5.50% at the November monetary policy meeting.
- Boston Fed President Susan Collins remains confident about further policy tightening. Collins said on Friday that a further rate hike is certainly not off the table. She further added that inflation can fall with only a modest rise in unemployment and that core services excluding shelter have not yet shown a sustained improvement.
- Contrary to this sentiment, Morgan Stanley’s Chief US Economist Ellen Zentner believes that the Fed is done hiking rates. She further added that with inflation cooling, the central bank will likely keep rates on hold until it’s ready to cut next year.
- The US Dollar Index is consolidating in the 105.30-105.80 range over the last three trading sessions. The broader trend is quite positive amid US economic strength, while other G7 economies are struggling for a stable footing.
- Meanwhile, US equities are under pressure as investors expect a “higher for longer” context for interest rates would dent overall demand. This may force US firms to trim their growth projections.
- This week, investors will focus on the Durable Goods Orders for August, which will be published on Wednesday. The economic data is seen contracting at a slower pace of 0.4% vs. July’s contraction of 5.2%.
Technical Analysis: Gold price juggles above $1,920
The Gold price struggles to find a direction amid uncertainty over the interest rate outlook. While traders bet on interest rates remaining unchanged, the Fed’s Collins delivered a hawkish commentary. On the daily chart, the Gold price forms a Symmetrical Triangle, which demonstrates a volatility squeeze due to the absence of an economic trigger. The 20 and 50-day Exponential Moving Averages (EMAs) continue to restrict upside in the Gold price.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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