Gold recovers in style despite Fed pushes back March rate-cut prospects, US NFP eyed

Gold price bounces back strongly as the “early rate-cuts” narrative wanes.
The Fed needs more evidence to be confident that inflation will return to 2%.
The US Dollar advances of ISM Manufacturing PMI, NFP data.

Gold price (XAU/USD) recovers swiftly in Thursday’s early New York session. The downside in the Gold price remains well-supported as investors know that rate cuts from the Federal Reserve (Fed) this year cannot be ruled out. In his monetary policy statement, Fed Chair Jerome Powell showed disinterest in rate-cut speculation, arguing that policymakers are still unconvinced that underlying inflation will sustainably return to the 2% target. As Jerome Powell has spooked expectations of rate cuts in March, investors have turned to May’s policy meeting for the first rate cut of this cycle.

As we advance, the inflation outlook will be guided by labor market conditions, consumer spending, and economic growth, which will set a fresh undertone for rate-cut expectations.

Meanwhile, investors await January's Institute for Supply Management's (ISM) Manufacturing PMI and the Nonfarm Payrolls (NFP) data. The expectations of a rate cut at May’s Fed monetary policy meeting could wane if the employment and wage growth data turn out higher than expected.

Daily digest market movers: Gold price revives losses while US Dollar retreats

Gold price rebounds strongly from the day’s low near $2,030 despite the Federal Reserve not being interested in reducing interest rates in March.
In his monetary policy statement on Wednesday, Fed Chair Jerome Powell turned down speculation for reducing interest rates until policymakers get greater confidence that underlying inflation will sustainably return to the 2% target.
A strict denial for rate cuts in March has shifted expectations to the May policy meeting.
As per the CME Fedwatch tool, traders see a 61% chance of a rate cut by 25 basis points (bps) to 5.00%-5.25% for May.
The Fed’s decision to keep interest rates unchanged in the range of 5.25%-5.50% for the fourth straight time was widely anticipated.
Also, Jerome Powell said, “risks to achieving full employment and 2% inflation are better balanced.”
The US Dollar Index (DXY) faces pressure near 103.80 as investors know that rate cuts by the Fed are imminent. Meanwhile, various economic data are lined up that will guide further action in the safe-haven assets.
In today’s session, market participants will focus on the ISM Manufacturing PMI for January and the Initial Jobless Claims (IJC) for the week ending January 26.
According to the estimates, the Manufacturing PMI fell to 47.0 from December’s reading of 47.4. The reasoning behind lower factory output would be higher furloughs due to the festive mood.
The Manufacturing PMI data will be followed by the official Employment data for January, which will be published on Friday.
The private Employment Change data, reported by the ADP on Wednesday, showed that private employers recruited 107K workers in December, which was significantly lower than expectations of 145K and the former reading of 158K.
This has set a negative undertone for the NFP data ahead. Investors anticipate that overall payroll additions slowed to 180K against 216K in December. The Unemployment Rate is expected to increase to 3.8% from 3.7%.
Apart from employment numbers, wage growth data will in be the focus as it will guide inflation, being a major contributor to high price pressures.
The annual Average Hourly Earnings is seen steady at 4.1%. The month-on-month wage growth may have grown at a slower pace of 0.3% against a 0.4% increase in December. A slowdown in the wage growth data would soften the inflation outlook.

Technical Analysis: Gold price bounces back from $2,030

Gold price recovers vertically ahead of the US ISM Manufacturing PMI and the Employment data. From a technical perspective, the broader outlook for the precious metal is upbeat as it has delivered a breakout of the Symmetrical Triangle chart pattern formed on a daily timeframe. The 20-day Exponential Moving Average (EMA) at $2,032.50 is acting as a cushion for the Gold price.

The 14-period Relative Strength Index (RSI) is approaching the 60.00 hurdle. If the RSI manages to sustain above the hurdle, bullish momentum could be triggered.

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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