- Gold price drops further as bets in favour of early rate cuts by the Fed drop slightly.
- Action in the FX domain could turn volatile as FOMC Minutes and Manufacturing PMI are due for release.
- The US Dollar Index recovers as upbeat sentiment-based rally pauses.
Gold price (XAU/USD) turned negative on Wednesday amid caution ahead of the Federal Open Market Committee (FOMC) minutes and crucial data from the United States, namely the Institute for Supply Management (ISM) Manufacturing PMI for December and JOLTS Job Openings data for November.
The commentary from Richmond Federal Reserve (Fed) Bank President Thomas Barkin has weighed heavioly on the Gold prices. Fed Barkin said inflation is progressively declining towrds 2% inflation alongwith healthy economic prospects. Barkin added that the case of a 'soft landing' is highly likely but will have some risks associated such as high interest rates on credit, outside shocks, services inflation getting stuck at a high levels and demand remaining strong, which will keep chances of additional rate hikes on the table.
The precious metal faces selling pressure as investors reconsider their bets in favour of a rate cut by the Fed in March. An absence of significant discussions about rate cuts by Fed policymakers in the FOMC minutes will dampen the near-term appeal for Gold and support the US Dollar (USD) and Treasury yields.
On the economic data front, the ISM PMI is expected to signal that the US manufacturing sector remained in a contraction trajectory for the 14th month in a row. Meanwhile, higher job postings by US employers will indicate a steady labor demand.
Daily Digest Market Movers: Gold price dives swiftly while US yields recover swiftly
- Gold price surrenders gains generated on early Wednesday and has turned negative as prospects of early rate cuts by the Federal Reserve have trimmed slightly ahead of the publication of the FOMC minutes.
- As per the CME Fedwatch tool, chances of an interest rate cut by 25 basis points (bps) in March have dropped to 67% from 72%.
- The FOMC minutes will provide a detailed explanation about the decision to maintain rates on hold in December’s monetary policy for the third time in a row.
- Apart from that, the outlook on interest rates and the underlying inflation for 2024 and 2025 will be keenly watched.
- Less discussions about rate cuts among policymakers may dampen the near-term appeal for Gold and demand for safe-haven assets will heat up.
- Fed Chair Jerome Powell, in its monetary policy statement, said rate cuts will be a topic of discussion going forward. Cues favouring a delay in rate cuts may stem a dismal market mood.
- In addition to the FOMC minutes, investors will keep an eye on the ISM Manufacturing PMI for December, which will be published at 15:00 GMT.
- The Manufacturing PMI is seen at 47.1, below the 50.0 threshold for the 14th straight month, but higher than the former reading of 46.7. A figure below 50.0 signals contraction in the manufacturing sector.
- Investors will also focus on the fresh orders for the manufacturing sector, which will provide the outlook for 2024.
- Apart from that, the US Bureau of Labor Statistics will publish the JOLTS Job openings data for November. Estimates indicate that job postings were higher at 8.85M against the former reading of 8.733M.
- Meanwhile, a sharp recovery in the US Treasury yields has capped the upside in Gold prices. The 10-year US Treasury yields have recovered to nearly 4.0% as investors are realizing that robust strength in the United States economy in 2024 could delay rate cuts.
- The US Dollar Index (DXY) clings to gains near 102.20 as investors are uncertain in a data-packed week.
- After the ISM factory data, investors will look for the crucial labour market data for December. On Thursday, the Automatic Data Processing (ADP) Employment data will provide fresh cues about labour demand.
- As per estimates, private US employers added 115K job-seekers in December against 103K payrolls created in November.
Technical Analysis: Gold price skids below $2,050
Gold price has extend its downside to weekly low below $2,040 after failing to sustain above the $2,080 resistance. The precious metal breks down ahead of crucial US events after failing to find support near . Upward-sloping 20-day and 50-day Exponential Moving Averages (EMAs) indicate that the overall trend is still bullish.
Inflation FAQs
What is inflation?
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
What is the Consumer Price Index (CPI)?
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
What is the impact of inflation on foreign exchange?
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
How does inflation influence the price of Gold?
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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