Gold remains delicate as strong retail spending strengthens US Dollar

Gold price recovery attempt falters after strong consumer spending momentum.
The US Dollar demonstrates a volatility compression as higher headline CPI failed to boost Fed hawks.
The release of the US PPI and Retail Sales might boost price action in Gold.

Gold price (XAU/USD) delivers wild moves as the US Dollar rises vertically after strong consumer spending momentum and higher headline Producer Price Index (PPI) data. The US Census Bureau reported that monthly Retail Sales rose sharply by 0.6% in August vs. expectations of 0.2% and July's reading of 0.5%. Monthly headline PPI grew by 0.7% vs. estimates and the former release of 0.4%. The US headline PPI, on an annual basis, accelerated to 1.6%, doubling the former release of 0.8%.

The US Department of Labor showed that individuals claiming jobless benefits for the first time rose by 220K while investors anticipated higher jobless claims at 225K. In the previous week, jobless benefits were recorded at 216K. Jobless claims remained higher than the prior week's figures after declining straight for five weeks.

Earlier, the yellow metal remained subdued on Thursday as a stickier US inflation report for August confused investors about further direction. The precious metal strives for a decisive move as the market hopes that the impact of higher headline inflation due to rising gasoline prices remains limited to the headline Consumer Price Index (CPI). The US Dollar demonstrates a volatility compression after a slightly hot inflation report failed to prompt hawkish Federal Reserve (Fed) bets.

After the US inflation report, investors shifted their focus to the consumer spending data for August, which will solve the interest rate puzzle further. The current restrictive interest rate cycle has failed in denting labor demand and consumer spending significantly, but the market remains worried that a “higher for longer” rate context could dampen the broader picture ahead.

Daily Digest Market Movers: Gold price drops as US Dollar strengthens

Gold price faces selling pressure due to upbeat consumer spending momentum. Monthly Retail Sales for August rose sharply by 0.6% in August vs. expectations of 0.2% and July's reading of 0.5%. Monthly headline PPI grew by 0.7% vs. estimates and the former release of 0.4%. The US headline PPI, on an annual basis, accelerated to 1.6%, doubling the former release of 0.8%.
The US Department of Labor showed that individuals claiming jobless benefits for the first time rose by 220K while investors anticipated higher jobless claims at 225K. In the previous week, jobless benefits were recorded at 216K. Jobless claims remained higher than the prior week's figures after declining straight for five weeks.
On Wednesday, the US Bureau of Labor Statistics reported that monthly headline inflation grew at a 0.6% pace as anticipated by market participants, higher than the former reading of 0.2% due to a rally in gasoline prices. Annualized headline CPI accelerated to 3.7% vs. expectations of 3.6% and the former release of 3.2%.
Core CPI that strips off volatile food and oil prices expanded at a higher pace of 0.3% than expectations and the prior reading of 0.2%. US core CPI, on an annual basis, softened to 4.3% as projected against July’s reading of 4.7%.
Overall energy prices that include components like gasoline, electricity, and utility gas prices spiked 5.6% in August due to the global oil rally that pushed headline inflation higher at a stronger pace.
Federal Reserve policymakers tend to consider core CPI specifically, but higher headline inflation could prompt input prices for core goods and encourage them to keep doors open for further policy tightening.
As per the CME Fedwatch Tool, traders see a 97% chance for interest rates to remain steady at 5.25-5.50% at the September 20 Federal Open Market Committee (FOMC). The bet was 93% before the inflation data release. For the rest of the year, traders anticipate almost a 56% chance for the Fed to keep monetary policy unchanged.
JP Morgan Asset Management commented Wednesday that it does not anticipate the Fed implementing further interest rate hikes this cycle. They said that the impact of the ongoing rise of oil prices in early September on inflation will be limited.
Inflation data for August remained insufficient to boost hopes for more interest rate increases from the Fed in 2023, but a likely slowdown in the economy cannot be avoided. The Fed is expected to keep interest rates “higher for longer” as inflation in excess of the required rate seems stickiest. The Unemployment Rate is seen rising further due to a poor demand outlook and higher interest rates.
The US Dollar Index (DXY) trades in a limited range around 104.70 as the upside is restricted amid expectations that the Fed is done with hiking interest rates, while the downside is being supported by a slightly hotter inflation report.

Technical Analysis: Gold price continues to defend the $1,900 support

Gold price hovers near a three-week low, marginally above the crucial support of $1,900. The precious metal struggles to discover bids as the inflation report for August indicates upside risks to headline inflation due to rising gasoline prices. The yellow metal fails to sustain above the 200-day Exponential Moving Average (EMA), which trades at around $1,910.00. The declining 20 and 50 EMAs portray a bearish short-term trend.

Central banks FAQs

What does a central bank do?

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

What does a central bank do when inflation undershoots or overshoots its projected target?

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

Who decides on monetary policy and interest rates?

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Is there a president or head of a central bank?

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

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