Gold price comes under pressure as US Dollar rebounds
- Gold price falls back as the focus shifts to the Jackson Hole Economic Symposium.
- The US Dollar continues to enjoy liquidity amid caution about China’s economic outlook.
- United States August economic calendar could have a significant impact on the Fed’s September monetary policy meeting.
Gold price (XAU/USD) surrenders gains and slips back below the crucial support at $1,900 as investors shift their focus towards the Jackson Hole Economic Symposium, which will start on Thursday. Investors will likely take clues from the event about the Federal Reserve’s (Fed) roadmap of achieving price stability without deviating from a low Unemployment Rate.
Fears of a recession in the United States economy have receded amid tight labor market conditions and strong consumer spending momentum propelled by steady wage growth. Fresh predictions about Fed’s interest rate guidance signal that the central bank will keep interest rates at high levels until March 2024.
Daily Digest Market Movers: Gold price faces sell-off as US Dollar rebounds
- Gold price’s downside momentum fades after stabilizing below the crucial support of $1,900.00. However, more downside seems favored.
- The precious metal continues to face a sheer sell-off as the US Dollar Index (DXY) delivers a five-week winning streak.
- The appeal for the US Dollar improved last week as investors turned cautious about China’s economic outlook.
- Deflation risks are high in the Chinese economy due to weak demand and declining exports.
- The Chinese authorities are expected to deliver more fiscal support to uplift growth prospects and elevate hiring momentum.
- On Monday, the People’s Bank of China (PBoC) cut its one-year Prime Lending Rate (PLR) by 10 basis points (bps) to 3.45%, while the five-year PLR was left unchanged at 4.20%.
- The scale of the one-year PLR cut by the PBoC was lower than the 15bps expected cut.
- The US Dollar trades sideways on Monday as investors shift focus toward the Jackson Hole Economic Symposium, which will begin on Thursday.
- 10-year US Treasury Yields jump to 4.3% as investors expect the Fed to further increase interest rates in the context of still high inflation.
- Federal Reserve chair Jerome Powell is expected to deliver the economic outlook and the interest rate guidance for September monetary policy at Jackson Hole.
- Investors are keen to know how the Fed expects to get rid of the ‘last mile’ of stubborn inflation to achieve price stability and keep the Unemployment Rate at low levels.
- Federal Open Market Committee (FOMC) minutes for July’s policy meeting indicated that the central bank will be more dependent on the incoming data for further action.
- The majority of Fed policymakers expect that interest rates haven’t peaked yet as labor market conditions are still tight and strong wage growth has increased the disposable income of households.
- A Reuters poll conducted between August 14-18 showed that the Fed will keep interest rates steady in September and will not cut rates before March next year. Meanwhile, the odds of a recession have dropped to 40%, the lowest in a year.
- Receding recession fears, tight labor market, and stubborn ”last mile” inflation could force the Fed to keep interest rates higher for a longer period.
Technical Analysis: Gold price sets for further downside
Gold price turns back-and-forth after recording a fresh swing low marginally below $1,885.00 on a daily time frame. For the past three weeks, each pullback move in the precious metal has been capitalized as a selling opportunity by market participants. The yellow metal trades below the 200-day Exponential Moving Average (EMA), which indicates that the long-term trend has turned bearish.
Momentum oscillators suggest that a bearish impulse is extremely strong, which will keep volatility on the higher side.
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.
Author
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
