- Gold price delivers a range breakout ahead of the Fed’s monetary policy decision.
- The US Dollar remains subdued as the Fed is expected to keep the interest rates unchanged.
- A steady policy announcement is likely to be followed by a hawkish outlook.
Gold price (XAU/USD) extends recovery ahead of the interest rate decision by the Federal Reserve (Fed). An unchanged monetary policy along with a hawkish interest rate outlook is widely anticipated as the Core Consumer Price Index (CPI), which is generally considered when setting the interest rate framework, is consistently declining.
Worries about the interest rate outlook from the Fed deepen as US Treasury Secretary Janet Yellen said that growth has to slow to ensure price stability in a low unemployment scenario. The economic resilience of the US economy is good news, but it is also becoming a major roadblock for Fed policymakers in their quest to bring back inflation to the desired rate. Labor demand, wage growth, and consumer spending have remained strong, while woes in the manufacturing and the housing sector persist.
Daily Digest Market Movers: Gold price strengthens ahead of Federal Reserve meeting
- Gold price discovers buying interest after remaining sideways near $1,930 ahead of the monetary policy decision from the Federal Reserve, which will be announced at 18:00 GMT.
- The Fed is expected to leave interest rates unchanged for the second time in the current tightening spell initiated in March 2022 as inflation is consistently softening.
- 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 60% chance for the Fed to also keep monetary policy unchanged.
- Market participants will keenly watch for guidance on interest rates and the economic outlook. Investors remain mixed about whether the Fed will keep the doors open for further policy tightening or will provide cues about rate cuts.
- The Fed is expected to deliver hawkish guidance as the so-called ‘last mile’ of inflation, which is the remaining path towards the desired rate of 2%, seems the stickiest.
- Upside risks for the Fed remaining hawkish on the interest rate outlook are also propelled by the recent surge in gasoline prices. Oil prices rallied almost 40% in the past four months, driven by production cuts from Saudi Arabia and Russia.
- Higher gasoline prices could elevate transportation costs, which might propel input costs at factory gates and their burden will likely be passed on to end consumers.
- In spite of higher interest rates by central bankers, the US economy has remained resilient while other G7 economies have suffered an economic slowdown.
- Investors see the US economy walking on a “golden path” as labor growth remains steady. This would mean a situation where inflation recedes without pushing the economy into a recession.
- A surprise discussion about rate cuts from Fed policymakers might shoot demand for US equities and weaken the appeal for the US Dollar.
- The US Dollar Index (DXY) remained calm before the Fed meeting, trading sideways slightly above 105.00.
- Yields offered on shorter-time US Treasuries have advanced more than longer-period bonds, a situation which historically has been an indicator of an upcoming recession.
- US Treasury Secretary Janet Yellen is confident about economic prospects, but warned on Tuesday that growth has to slow further to bring down inflation as the economy is consistently operating at full employment levels.
- US Housing Starts declined in August as higher mortgage rates forced home buyers to postpone purchases. Housing Starts contracted by 11.3% in August compared with the previous month. This is the sharpest decline in more than three years.
- While US homebuilding activity plunged heavily, demand for new buildings rose sharply by 6.9%.
Technical Analysis: Gold price climbs above $1,940
Gold price jumps to near $1,944.00 ahead of the Fed’s monetary policy. The precious metal shows signs of volatility compression but continues to defend the 50-day Exponential Moving Average (EMA). On a lower time frame, the yellow metal demonstrates evidence of a slowdown in the upside momentum. Gold price is expected to turn volatile after the monetary policy announcement by the Fed.
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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