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Gold exhibits strength while US Dollar falls, focus remains on US core PCE data

Republished By Plato
Republished By Plato

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  • Gold price seeks more upside amid weak US Durable Goods Order data.
  • Fed’s Schmid says there is no need to rush rate cuts.
  • The US core PCE price index data will significantly impact prospects for Fed rate cuts.

Gold price (XAG/USD) exhibits strength against the US Dollar in Tuesday’s early New York session on hopes that the Federal Reserve (Fed) will eventually bring interest rates down. However, the upside in the precious metal seems capped as Fed policymakers lean towards maintaining interest rates higher for longer to build downward pressure on sticky inflation.

Non-yielding assets, such as Gold, attract higher inflows when investors believe the Fed will eventually begin to roll back its restrictive interest rate stance. Spot prices of Gold are up by 0.23% at $2,036.

Fed policymakers underpin a wait-and-watch approach on interest rates, citing that risks associated with premature rate cuts are higher than postponing them. The Fed is expected to avoid considering rate cuts until it gets evidence that inflation will fall sustainably to the 2% target.

This week, the US Dollar will be guided by the United States core Personal Consumption Expenditure – Price Index (PCE) data, which will be published on Thursday. Fed policymakers consider the underlying inflation data before preparing remarks on interest rates. The degree of change in the core PCE inflation data would influence market expectations for rate cuts.

Daily Digest Market Movers: Gold price awaits US core PCE data

  • Gold price rises sharply to $2,040 as the US Dollar falls onto the backfoot.
  • The precious metal climbs to almost a three-week high even though investors remain uncertain about rate cuts by the Federal Reserve (Fed).
  • All Fed policymakers have argued against premature rate cuts as they could flare up price pressures again.
  • Also, policymakers still gather evidence to confirm that inflation will decline sustainably to the 2% target.
  • On Monday, Kansas City Federal Reserve Bank President Jeffrey Schmid said a tight labor market, considerable momentum in households’ demand, and inflation above 2% leave no room for an aggressive adjustment in the monetary policy stance.
  • As per the viewpoint of Jeffrey Schmid, the Fed needs to be patient and observe how the economy responds to policy tightening. The rate cuts could be announced only after gaining confidence that a victory can be announced against sticky inflation.
  • Meanwhile, the US Census Bureau has reported weaker than anticipated Durable Goods Orders data for January. New orders for Durable goods were contracted sharply by 6.1% against expectations of 4.8%. The economic data for December has been revised to -0.3% from a stagnant performance.
  • Going forward, investors will majorly focus on the core PCE price index, which could meaningfully influence the expectations for rate cuts by the Fed.
  • The expectations from investors show that the core PCE price index data rose by 0.4% on a month-on-month basis against a 0.2% increase in December. In the same period, the annual inflation data is expected to have decelerated to 2.8% from 2.9%.

Technical Analysis: Gold price aims to recapture $2,040

Gold price approaches the downward-sloping border of the Symmetrical Triangle pattern, which is plotted from the December 28 high at $2,088. The upward-sloping border of the chart pattern is placed from the December 13 low at $1,973.

The triangle could break out in either direction. However, the odds marginally favor a move in the direction of the trend before the formation of the triangle – in this case, up. A decisive break above or below the triangle boundary lines would indicate a breakout is underway. 

The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 region, which indicates indecisiveness among investors.

Fed FAQs

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.

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.

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.

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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