Gold price stretches downside amid strength in Greenback as Fed to resume policy toghtening
|- Gold price faces an intense sell-off as investors are confident that the Fed will raise interest rates further on July 27.
- More rate hikes are broadly anticipated as the United States' core inflation remains resilient.
- Support from BRICS’ gold-backed currency discussions is losing its appeal.
Gold price drops sharply as investors focus their attention on the Federal Reserve (Fed), which is likely to resume its policy tightening spell next week after skipping in June. In addition to the Fed, the Bank of England (BoE) and the European Central Bank (ECB) are also preparing for raising interest rates further so that inflation can return to the 2% target. The appeal for Gold is diminishing as more interest-rate hikes from the Fed would also propel fears of a recession in the United States.
It looks like Gold’s strength from discussions about introducing a new gold-backed currency by the BRICS (Brazil, Russia, India, China, and South Africa) is losing its appeal. The reasoning behind introducing a new gold-backed currency, an announcement which is expected in August, is that it might be used for international payments.
Daily Digest Market Movers: Gold price eyes more losses amid caution ahead of Fed policy
- Gold price turns sideways after a corrective move from a two-month high of $1,987.50 as the US Dollar Index shows resilience ahead of the monetary policy by the Federal Reserve, whose decision will be announced on July 27.
- In spite of a significant decline in United States inflation, easing labor market conditions, and slow momentum in consumer spending growth, investors expect one more interest-rate hike of 25 basis points (bps) to 5.25-5.50%.
- Market participants expect that US inflation will decline, but it is far from the desired rate of 2%. Therefore, further policy tightening cannot be ruled out.
- Investors are anticipating that next week’s rate hike will be the last nail in the coffin and that interest rates will peak for the current year.
- The US Dollar Index has posted a three-day winning spell after nosediving last week as the room for more interest-rate hikes by the Fed is still open.
- Meanwhile, US labor market conditions are regaining strength again, according to weekly Jobless Claims data, which have surprisingly dropped.
- Individuals claiming jobless benefits for the first time declined to 228K for the week ending July 16, lower than the 242K expected and the former release of 237K.
- Loosening labor market conditions were decelerating inflationary pressures, and a recovery in the same could elevate overall consumer spending and slow down the current disinflation trend.
- The US housing market is facing the wrath of higher interest rates by the Fed as Existing Home Sales for June declined by 3.3% and Housing Starts decreased by 8.0% on a monthly basis.
- According to the latest data from the Federal Reserve, bank borrowings from the Fed’s emergency lending programs snapped their two-week decline and climbed in the week ended July 19.
- Despite tight credit conditions by commercial banks, the increase in the Fed’s lending data indicates that demand for credit by firms is resilient even in a high-interest-rate environment.
- Market mood has turned cautious as US tech stocks have come under pressure amid a disappointing second-quarter earnings season.
- US Treasury Yields follow the footprints of the US Dollar Index. The yields offered on 10-year US Treasury bonds are around 3.85%.
Technical Analysis: Gold price demonstrates action around $1,960
Gold price faces pressure above $1,980.00 as the US Dollar Index rebounds meaningfully. However, the broader trend of Gold is bullish as it trades comfortably above the 20-day Exponential Moving Average (EMA) at $1,950.00. Investors should note that 20- and 50-day EMAs are on the verge of delivering a bullish crossover. This would strengthen the upside bias further. Fresh longs are expected in Gold price if it manages to climb above $1,980.00 convincingly.
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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