Gold retreats from all time highs as US Manufacturing PMI rises above 50.0

Gold price corrects sharply after refreshing a new all-time high, following the release of the upbeat US Manufacturing PMI data.
The US Manufacturing PMI rises above 50.0 for the first time in more than a year.
Jerome Powell sees the pace of decline in February’s core PCE inflation aligned with the Fed’s required rate.

Gold price (XAU/USD) faces selling pressure near fresh all-time highs around $2,265 in Monday's early New York session. The precious metal drops as the US Dollar soars after the release of the upbeat United States Institute of Supply Management (ISM) Manufacturing PMI for March. The ISM reported that the Manufacturing PMI lands above the 50.0 threshold for the first time after contracting for 16 months in a row. A figure below the 50.0 threshold suggests that the business activity in the US manufacturing sector contracted in this period. The Manufacturing PMI rises to 50.3 from expectations of 48.4 and the prior reading of 47.8. The New Orders Index jumps to 51.4 from 49.2 in February.

The US Dollar Index (DXY), which tracks the value of the US Dollar against six major currencies, rallies to 104.90 as upbeat factory data indicate a sharp recovery in the US economic outlook. Meanwhile, uncertainty ahead of a busy week in the United States’ economic calendar would keep the near-term demand upbeat.

On a broader timeframe, Gold still exhibits strength as expectations for the Federal Reserve (Fed) lean towards June as the meeting to cut interest rates has increased. Fed Chair Jerome Powell validated the decline in February’s core Personal Consumption Expenditures inflation (PCE) data as the Fed looks for evidence of price pressures easing to the 2% target.

Higher expectations for the Fed to cut rates, especially after a two-year period of rate hikes, dent yields on interest-bearing assets such as US bonds. However, this increases the investment value of Gold. 10-year US Treasury yields were slightly up in Monday’s European session but have come down to 4.20%.

Daily digest market movers: Gold price falls back as US Dollar rallies

Gold price falls sharply after refreshing an all-time high near $2,260. On a broader note, the demand for the precious metal remains buoyant as market expectations for the Federal Reserve starting its rate-cut cycle in June escalate.
Fed Chair Jerome Powell said Friday that the latest US inflation data was "along the lines of what we would like to see," while interviewed by public radio's "Marketplace" program, boosted rate-cut expectations for June. According to the CME FedWatch tool, traders see a 68% chance that rate cuts will be announced in June. The expectations have increased from the 60% observed before the release of February’s core PCE Price Index data on Friday.
While Fed Powell remains confident in progress in easing inflation, he acknowledged that the central bank doesn’t need to hurry for rate cuts with the economy on a strong footing. He recognized the need to see more progress on inflation before cutting interest rates and cautioned the need to be careful on rate cuts, citing strong economy and labor market conditions.
The monthly and annual core PCE inflation grew by 0.3% and 2.8% in February as expected. However, January’s estimates were upwardly revised to 0.5% on month and 2.9% on year from the 0.4% and 2.8% increases previously estimated, respectively.
The Fed’s preferred inflation measure is at its lowest level in almost two years, supporting higher Fed rate cut expectations for June.
This week, the United States Nonfarm Payrolls (NFP) report for March, scheduled for Friday, is the main event to look at as it will likely provide more clarity on when the Fed could start reducing interest rates.

Technical Analysis: Gold price faces pressure near $2,265

Gold price falls sharply after refreshing all-time highs at $2,265. The precious metal strengthened after breaking above the prior lifetime high of $2,223, printed on March 21. More upside in the Gold price is possible as it is trading in unchartered territory. All short-to-long term Exponential Moving Averages (EMAs) are sloping higher, suggesting strong near-term demand.

The 14-period Relative Strength Index (RSI) reaches 78.00, indicating strong upside momentum but already in overbought territory. Signs of divergence are absent, and an overbought signal cannot be ruled out.

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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