Gold price soars as soft US core PCE report deepens rate cut expectations
|- Gold price rises sharply to near $2,060 after soft core PCE inflation report for November.
- Soft inflation report has boosted Fed’s rate cut expectations.
- The US Dollar Index is battered by rate cut bets and downwardly revised US Q3 GDP data and soft inflation data.
Gold price (XAU/USD) advances as the United States Bureau of Economic Analysis (BEA) has reported softer-than-anticipated core Personal Consumption Expenditure (PCE) price index report for November. Monthly core PCE price index data grew at a slower pace of 0.1% against expectations and the former reading of 0.2%. On an annual basis, the underlying inflation data decelerated to 3.2% vs. consensus of 3.3% and the former print of 3.5%. In the monetary policy statement of December, Fed policymakers projected that PCE inflation, their preferred inflation tool, would decelerate to 3.2% by the end of 2023.
More-than-projected decline in the core PCE data may boost expectations of early interest rates unwinding by the Federal Reserve (Fed). Market participants have been betting in favour of early rate cuts by the Fed due to significant improvement in the Consumer Price Index (CPI) towards the 2% target.
Meanwhile, US Durable Goods Orders for November have outperformed expectations of investors. Fresh orders for durable goods were upby 5.4% against expectations of 2.2%. In October, nre orders for durable goods were contracted by 5.1%.
Daily Digest Market Movers: Gold price extends upside on soft US core PCE data
- Gold price has climbed above the crucial resistance of $2,060 after soft US core PCE inflation report.
- The annual US core PCE data has softened to 3.2%, as projected by the Fed in its Summary of Projections (SOP) delivered in last week's monetary policy meeting where it kept interest rates unchanged.
- A steeper-than-projected decline in the underlying inflation report would push back expectations of a longer restrictive policy stance and put the rate-cut factor into the spotlight.
- Investors are pricing in that the Fed would announce its first rate cut in March after a year-long rate tightening spell. A second cut would come in May.
- Expectations for lowering interest rates were boosted by commentary from Fed Chairman Jerome Powell , who talked about avoiding the mistake of keeping interest rates too high.
- The majority of Fed policymakers are trying hard to push back expectations of rate cuts, emphasizing the idea of keeping interest rates in a restrictive trajectory until the achievement of price stability.
- Fed policymakers are reiterating that strong resilience in the US economy could keep inflation fears persistent.
- On Thursday, the US Dollar came under pressure after a slight downgrade in the third quarter Gross Domestic Product (GDP) estimate on Thursday.
- The US BEA downgraded Q3 growth rate in its revised estimate to 4.9% against expectations of 5.2%, weighing heavily on the US Dollar.
- A downwardly revised GDP indicates a cooling labour market and price pressures. Still, economic growth in the US is still higher in comparison with other Group of Seven economies.
Technical Analysis: Gold price approaches $2,060
Gold price refreshes two-week high above $2,060 after recovering swiftly from $1,974. The precious metal is expected to continue its upside towards $2,070, supported by deepening rate cut expectations. A bullish momentum has been triggered as the Relative Strength Index (RSI) (14) has climbed above 60.00.
Fed FAQs
What does the Federal Reserve do, how does it impact the US Dollar?
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.
How often does the Fed hold monetary policy meetings?
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.
What is Quantitative Easing (QE) and how does it impact USD?
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.
What is Quantitative Tightening (QT) and how does it impact 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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