Gold price remains on backfoot as traders pare Fed rate cut bets

  • Gold price falls sharply as Fed Waller maintains a higher for longer interest-rates narrative.
  • The last leg of high US inflation has turned out to be significantly stubborn.
  • Guidance from three Fed policymakers and US Retail Sales data are due on Wednesday.

Gold price (XAU/USD) has extended its correction on Wednesday as a hawkish commentary from Federal Reserve (Fed) Governor Christopher Waller has casted doubts about a rate cut by the central bank in the March meeting. Fed policymakers have been favouring interest rates to remain higher for longer, defying market expectations, amid a lack of confidence in inflation returning towards the 2% target in a timely and sustainable manner.

The Consumer Price Index (CPI) data for December indicated that the last leg of high price pressures is quite challenging for Fed policymakers, likely due to steady labor market conditions and decent consumer spending momentum. A quick rate cut decision by the Fed can lead to persistence in inflationary pressures and dampen the work done to achieve price stability.

Later in the day, the performance of the US Dollar, Treasury yields and bullions will be guided by the United States Retail Sales and Industrial Production data for December. The chances for the Fed cutting interest rates in March could ease further if the Retail Sales report comes in stronger than projected.

Daily digest market movers: Gold price falls further while US Dollar holds recovery

  • Gold price has extended its losses to near $2,017 and is expected to decline further towards the psychological support of $2,000.
  • The downside bias to the Gold price has strengthened as investors are uncertain about when the Federal Reserve could start discussing the timeframe for interest rate cuts.
  • A hawkish commentary from Fed Governor Christopher Waller has raised doubts about whether the central bank will cut interest rates in March.
  • Christopher Waller commented that the Fed should not rush to take interest rates down until it is ensured that inflation will return to the 2% target in a sustainable manner.
  • Waller added that the Fed should proceed with rate cuts “methodically and carefully” to bail out the economy from an expected slowdown. He further added that resilience in the US economy could delay potential reductions in borrowing costs.
  • Fed policymakers have become more determined to maintain a restrictive interest rate stance as the December inflation data turned out surprisingly stubborn.
  • After Waller’s commentary, Investment banking firm Goldman Sachs said the Fed could cut rates somewhat later or might announce one cut each quarter from April.
  • Meanwhile, bets supporting a rate cut by the Fed in March have dropped further. As per the CME Fedwatch tool, trades see a 61% chance for a 25-basis points (bps) interest rate cut in March, down from 70% at the start of the week. 
  • The increase in the  US Dollar Index (DXY) also weighed on Gold price. The USD Index has slightly corrected after posting a fresh monthly high above 103.50.
  • Further action in the US Dollar will be guided by the United States Retail Sales and Industrial Production data for December.
  • Investors have projected that Retail Sales increased was 0.4%, higher than the 0.3% rise in November. Industrial Production is seen stagnant after rising 0.2% in November.
  • Apart from the US economic data, Fed’s Beige Book and fresh outlook on interest rates from Fed speakers will be keenly watched. On Wednesday, Fed’s  Michael Barr, Michelle Bowman, and John Williams are due to speak. 
  • Fed policymakers are expected to endorse a restrictive monetary policy stance for a longer period than what is anticipated by market participants.

Technical Analysis: Gold price seeks support near 50-day EMA

Gold price continues its downside below $2,020 after Fed Waller’s hawkish remarks about interest rates. The near-term demand for Gold is not bullish anymore as price has dropped below the 20-day Exponential Moving Average (EMA), which trades around $2,036. The yellow metal has found interim support after sliding to near the 50-day EMA, which oscillates near $2,017. The 14-period Relative Strength Index (RSI) is declining towards 40.00, which could offer some cushion. However, a breakdown below the same will lead to the activation of bearish momentum.


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.

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