- Gold price generates more gains as Fed policymakers are confident that inflation is broadly declining.
- The FOMC minutes for January policy will be a detailed explanation behind the Fed’s steady interest rate decision.
- Investors see the preliminary S&P Global Manufacturing PMI for February at 50.5.
Gold price (XAU/USD) extends its bullish streak for the fourth straight trading session on Tuesday. The outlook for the precious metal has strengthened as commentary from Federal Reserve (Fed) policymakers that inflation is broadly moving in the right direction has faded the impact of stubborn Consumer Price Index (CPI) and Producer Price Index (PPI) data for January.
The confidence of Fed policymakers that inflation is declining over the long term has trimmed the opportunity cost of holding non-yielding assets such as Gold. Meanwhile, investors await the Federal Reserve Open Market Committee (FOMC) minutes for the first monetary policy meeting of 2024. The FOMC minutes will provide cues about the timing of three rate-cuts, as forecasted by the Fed.
On the economic data front, preliminary S&P Global PMI data for February will guide the forward action in the Gold price and the US Dollar, which will be published on Thursday. The US Manufacturing PMI is expected to exceed the 50.0 threshold for the second straight month at 50.5. An upbeat factory data would have a negative impact on the Gold price.
Daily Digest Market Movers: Gold price jumps higher ahead of FOMC minutes
- Gold price continues to generate gains and extend the upside above a four-day high of around $2,023.
- The upside in the precious metal seems restricted amid persistent fears of higher for longer interest rates by the Federal Reserve due to stubborn inflation data.
- The United States core inflation data is almost double the required rate of 2%, easing hopes of rate cuts by the Fed before June.
- The CME FedWatch tool shows that traders are confident that interest rates will remain unchanged in the range of 5.25%-5.50% till the May monetary policy meeting. For the June meeting, chances for a 25 basis points (bps) rate cut stand at 53%.
- While investors have significantly lowered their bets for rate cuts after stubborn consumer and producer price inflation data for January, Fed policymakers see the one-time high inflation as insignificant.
- Fed policymakers believe the longer-run inflation trend is declining, and overly focusing on a one-time blip could be a tremendous mistake.
- The US Dollar Index, which measures the value of the Greenback against six major currencies, is confined in a tight range around 104.20 as investors await the FOMC minutes for the January policy meeting, which will be released on Wednesday.
- The FOMC minutes will deeply explain the maintenance of interest rates at their current level for the fourth time in a row.
- In the monetary policy statement, Fed Chair Jerome Powell said a continuation of good data is required to reduce borrowing rates. Good data means easing price pressures.
- Meanwhile, 10-year US Treasury yields, which reflect expectations for Fed policy, are slightly up to near 4.30%.
Technical Analysis: Gold price stabilizes comfortably above $2,020
Gold price continues its winning spell for the fourth straight trading session. The precious metal attempts to deliver a decisive break above the 20 and 50-day Exponential Moving Averages (EMAs), which trade around $2,020.
The primary trend in the Gold price indicates indecisiveness among market participants due to a Symmetrical Triangle formation on a daily time frame. The upward and downward-sloping borders of the aforementioned chart pattern are plotted from December 13 low at $1,973 and December 28 high at $2,088, respectively.
The triangle could breakout in either direction, however, the odds marginally favor a move in the direction of the trend before the formation of the triangle – in this case up. A decisive break above or below the triangle boundary lines would indicate a breakout was underway.
The 14-period Relative Strength Index (RSI) has returned to the 40.00-60.00 range quickly after testing territory below 40.00, indicating a strong bullish reversal.
US Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.