- Gold price turns sideways after a sharp recovery as the focus shifts to US inflation data.
- Fed policymakers are worried about rising Treasury yields as they could dampen financial conditions.
- The US Dollar will dance to the tune of the FOMC minutes, consumer and producer inflation data.
Gold price (XAU/USD) holds onto a fresh weekly high, supported by the cautious market mood that is a product of the deepening Israel-Hamas conflict. The Israeli army responded to Hamas’ Saturday incursion with airstrikes on the Gaza Strip. Neutral commentary from Federal Reserve (Fed) policymakers has increased the perception that the central bank has finished raising interest rates.
Fed policymakers are worried about rising Treasury yields and warned that the central bank needs to be careful with interest rates as further policy-tightening could damage financial conditions. The US Dollar has failed to capitalize on Middle East tensions and is expected to remain under pressure ahead of the Producer Price Index (PPI) data for September and Federal Open Market Committee (FOMC) minutes.
Daily Digest Market Movers: Gold price turns choppy ahead of US CPI data
- Gold price aims to climb above $1,860.00, supported by an improvement in safe-haven appeal due to Middle East tensions and neutral commentary from Federal Reserve policymakers.
- Deepening Middle East tensions have improved the appeal for safe-haven assets as higher oil prices could elevate inflation risks.
- The risk-aversion theme is not too strong as an intense sell-off has not been witnessed yet. It seems that investors are waiting for how the situation in Israel develops.
- Israeli Prime Minister Benjamin Netanyahu said on Monday that Israel's response to the multi-pronged attack by Palestinian terror group Hamas will change the Middle East.
- As the appeal for safe-haven assets has improved, the Gold price is performing well against the US Dollar as traders are betting in favor of an unchanged interest rate policy in the monetary policy meeting on November 1.
- As per the CME FedWatch Tool, traders see an 88% chance of the Fed keeping interest rates unchanged at 5.25-5.50%, where they’ve stood since July. The odds of one more interest rate increase in any of the two remaining monetary policy meetings in 2023 have dropped to 28%.
- On Monday, Dallas Fed Bank President Lorie Logan drew less emphasis on raising interest rates further if long-term interest rates remain elevated because of higher Treasury yields.
- About the inflation outlook, Fed Logan said, "Progress on inflation is encouraging, but it's too early to be confident it is headed to the Fed's 2% target in a sustainable, timely way."
- While addressing the public at the National Association for Business Economics conference, Fed Vice Chair Phillip Jefferson emphasized the consideration of higher Treasury yields before arriving at any decision on interest rates.
- The 10-year US Treasury yield has soared to an almost 16-year high near 4.8%, which has prompted 30-year mortgage rates to rise to 7.5%.
- Fed’s Jefferson warned that the central bank needs to be careful with a further hike in interest rates.
- Last week Cleveland Fed Bank President Loretta Mester and Fed Governor Michelle Bowman announced support for one more interest rate increase in the remainder of 2023, citing the resilient US economy and expectations that progress in inflation declining to 2% will stall.
- The US Dollar Index (DXY) finds interim support near 106.00 after facing selling pressure due to neutral guidance on interest rates from Fed policymakers.
- Further action in the USD Index will be guided by the US inflation data for September, which will be released on Thursday.
- As per the estimates, monthly headline and Core inflation are seen expanding 0.3%. The annual headline and Core Consumer Price Index (CPI) are seen softening marginally to 3.6% and 4.1%, respectively.
- Before US CPI data, FOMC minutes for September monetary policy and producer inflation data will be released on Wednesday.
Technical Analysis: Gold price climbs to near weekly high
Gold price refreshed its weekly high at $1,860.00 on Tuesday amid a data-packed week and risk-aversion theme due to the Israel-Hamas conflict. The precious metal formed a wide Bullish Belthold candlestick pattern on Monday, which indicates a sharp recovery after a prolonged sell-off. Momentum oscillators have rebounded strongly after turning extremely oversold.
Interest rates FAQs
What are interest rates?
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
How do interest rates impact currencies?
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
How do interest rates influence the price of Gold?
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
What is the Fed Funds rate?
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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