- The price of gold is struggling to make a decisive move as investors are uncertain about the Fed’s rate cut.
- Investors focused on US inflation data due next week.
- Tensions in the Middle East continue to offer upside to safe-haven gold.
Gold price (XAU/USD) delivers volatile moves as US Bureau of Labor Statistics (BLS) revised consumer Price index (CPI) to reflect new seasonally adjusted factors. Monthly inflation figures for December were revised lower to 0.2% from 0.3%. Core CPI was unrevised at 0.3% over the same period. The November CPI increase was revised higher to 0.2% from 0.1%. For October, growth remained unchanged at 0.1%.
The precious metal is still inside Thursday’s trading range as investors focus on January’s United States Consumer Price Index (CPI), which will be released on Tuesday. Inflation data will provide further clues about when the Federal Reserve (Fed) might start cutting interest rates. The sooner interest rates fall, the better the gold price will be, reducing the opportunity cost of holding a non-performing asset.
As Fed policymakers continue to emphasize keeping interest rates on hold until there is more evidence that inflation will sustainably return to 2% and labor market conditions remain favorable, investors are losing confidence in the Fed, which has eased interest rates since May. CME’s FedWatch tool shows the odds of a 25 basis point (bps) rate cut in May fell to 51%.
In considering interest rate cuts, the Fed has consistently adhered to its dual mandate of easing price pressures and full employment. US labor market conditions are as optimistic as every week unemployment claims they keep falling. For the week ended Feb. 2, individuals filing for unemployment benefits for the first time came in at 218,000, down from expectations of 220,000 and an earlier release of 228,000. This suggests less need to cut interest rates and stimulate growth.
As market participants lose faith in the Fed easing interest rates since May, the broader appeal of the US dollar is improving. The American dollar it is negatively correlated with the price of gold and tends to attract higher foreign outflows Fed maintains a hawkish stance (higher interest rates) longer.
Daily Digest Market Movers: The price of gold remains within Thursday’s trading range
- The price of gold remains largely in the $2,020-$2,040 range, although Federal Reserve (Fed) policymakers have not declared a time frame for rate cuts.
- Fed policymakers are reluctant to give a specific time frame for rate cuts because they are still not convinced that inflation will fall sustainably to the 2% target.
- For the Fed to be confident of achieving price stability, it needs to see price pressures ease for several months.
- Boston Federal Reserve Bank President Susan Collins on Thursday reiterated the need for strong labor force growth and inflation progressing toward 2% before moving to expansionary policy.
- Susan Collins warned of risks that inflation will remain contained due to strong economic growth, although she is optimistic about easing price pressures.
- Richmond Federal Reserve Bank President Thomas Barkin advised the central bank to wait a while before easing interest rates because they could increase price pressures again.
- While uncertainty over the timing of the Fed’s rate cuts is limiting gold price gains, rising Middle East tensions are acting as a tailwind.
- The outlook for safe-haven assets such as gold is improving in times of geopolitical uncertainty.
- Tensions in the Middle East escalated when Israeli Prime Minister Benjamin Netanyahu rejected a cease-fire proposal due to unacceptable terms for a cease-fire. The Israeli leader said that only a few months remain until the complete destruction of Hamas.
- Meanwhile, the US Dollar Index (DXY) is trading back and forth in a narrow range above 104.00 as investors await US inflation data for January due out on Tuesday, February 13th.
- The attractiveness of the US dollar could improve further if inflation data is persistent. Stubborn inflation data would allow the Fed to keep interest rates higher for longer. This would lead to higher inflows of foreign capital for the US dollar.
Technical Analysis: The price of gold is trading at a peak around $2,030
The price of gold is in the range of $2,020-$2,039 on Thursday in the London session on Friday. Failure to make a decisive move indicates a sharp drop in volatility.
The price of gold forms a symmetrical triangle diagram pattern since December on the daily time frame, showing indecision among market participants. The downside and upside trendline boundaries of the above pattern are plotted from the December 28 high of $2,088 and the December 13 low of $1,973. The 50-day EMA at $2,023 continues to dampen gold bulls.
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 consists 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.