Home Forex Gold attempts recovery despite uncertainty over Fed rate cut bets remain untouched

Gold attempts recovery despite uncertainty over Fed rate cut bets remain untouched

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  • The price of gold found bets near $2,000 but remained on the backside amid fading hopes of a Fed rate cut.
  • Stubborn US inflation and robust retail sales data support continued interest rate hawkishness.
  • Market participants will focus on Fed Bostic’s comments ahead.

Gold price (XAU/USD) made a short-term recovery move amid a persistent downtrend. The price of gold printed a new monthly low near psychological support of $2,000 on Wednesday, before rebounding.

Despite the recovery, the precious metal remains on the back foot as investors continue to worry about when the Federal Reserve (Fed) will begin its long-awaited rate-cutting cycle. Hopes for an early rate cut decision by the Fed are fading as the latest leg of inflationary pressures in the United States are significantly more stubborn than previously thought, driven by robust consumer spending and stable labor market conditions.

Given the absence of major economic indicators, market participants are expected to focus on the former Monetary Policy meeting Fedwhich is scheduled for January 31. The Fed is widely expected to maintain interest rates unchanged in the range of 5.25-5.50%. Investors will focus on how the Fed proposes to make three rate cuts of 25 basis points (bps) each in 2024, as expected at its December policy meeting.

Daily Digest Market Movers: Gold price rises slightly as US dollar corrects

  • The price of gold is finding intermediate support near the psychological level of $2,000 after an intense sell-off.
  • Near-term demand continues to weaken as uncertainty deepens over the Federal Reserve’s interest rate cut in March.
  • Shops cut bets on support for a rate cut in March due to the resilience of the US economy.
  • Bets supporting a 25 basis point (bps) interest rate cut rose slightly to 61%, but are still below the 75% seen last week, according to CME’s Fedwatch tool.
  • Market expectations for early Fed cuts were dampened as price pressures in the US economy remained stubborn and consumer spending rose sharply in December.
  • The positive economic indicators gave Fed policymakers room to maintain a tight monetary policy for a longer period than market participants had anticipated prior to their release.
  • Fed Governor Christopher Waller said this week that the central bank should not rush to cut interest rates as more evidence is needed to ensure that price pressures return sustainably to 2%.
  • Christopher Waller recommended that the Fed cut interest rates “carefully and methodically” given the resilience of the US economy.
  • Meanwhile, the US Dollar Index (DXY) bounced back to 103.20 after a gradual correction, supported by risk-on market sentiment. 10-year US Treasury yields remain firmly above 4%.
  • Later, investors will focus on weekly jobless claims for the week ended Dec. 12 and comments from Atlanta Federal Reserve Bank President Raphael Bostic.
  • Bostic is expected to maintain a hawkish argument in light of stubbornly higher price pressures.
  • On Monday, the Fed’s Bostic noted that progress in bringing inflation down toward 2% could slow if policymakers cut interest rates soon.

Technical Analysis: Gold price rebounds from $2,000

Gold price tries to gain a foothold near psychological support at $2,000 on nominal downside American dollar Index. Short-term demand for the precious metal turned bearish as it dipped below the 50-period exponential moving average (EMA), which is trading around $2,017. The higher-high-higher-low formation in the price of gold is over and market participants could use pullbacks to build fresh shorts.

The 14-period Relative Strength Index (RSI) has dropped to near 40.00. If the RSI fails to hold above the 40.00 level, bearish momentum will be triggered.

Frequently asked questions about the Fed

Monetary policy in the US is shaped by the Federal Reserve System (Fed). The Fed has two mandates: to achieve price stability and to promote full employment. Its primary tool to achieve these goals is the adjustment of interest rates.
When prices rise too fast and inflation is above the Fed’s 2% target, it raises interest rates, which raises 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 can cut interest rates to encourage lending, which weighs on the dollar.

The Federal Reserve (Fed) holds eight policy meetings a year at which the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is comprised of twelve Fed officials—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 can resort to quantitative easing (QE) policy. QE is the process by which the Fed substantially increases the flow of credit in a troubled financial system.
It is a non-standard policy measure used during crises or extremely low inflation. It was the Fed’s weapon during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy high-quality bonds from financial institutions. QE usually weakens the US dollar.

Quantitative tightening (QT) is the reverse process of QE, where the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal of bonds it holds maturing into buying new bonds. It is usually positive for the value of the US dollar.

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