- Gold price faces an intense sell-off as Fed’s hawkish stance strengthens the US Dollar.
- The US economy has remained resilient on the grounds of a tight labor market and robust household demand.
- Investors await the US Durable Goods Orders to put some light on the manufacturing sector’s outlook.
Meanwhile, the upbeat United States Durable Goods Orders report for August also built pressure on the Gold price. New Orders expanded by 0.2% while investors anticipated a contraction of 0.5%. In the July month, fresh orders for core goods were contracted by 5.6%.
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 US economy has remained resilient on the grounds of tight labor market conditions and strong consumer spending, but the manufacturing sector has been a major headwind. A revival in the Manufacturing PMI could strengthen the US economy further. For more guidance on factory activity, investors will focus on the US Durable Goods Orders data, which will draw some light on the manufacturing sector outlook.
Daily Digest Market Movers: Gold price cracks as US Dollar moves higher to 106.60
- Gold price continues its two-day sell-off, dropping to over one-month low near $1,895 as US economic resilience stems concerns of a rebound in inflation.
- US inflation, measured by the Core Consumer Price Index, has softened from its peak of 6.6% to 4.3% in August, pressured by the Federal Reserve’s aggressive rate-tightening cycle. The last leg of high inflation seems stubborn due to robust consumer spending and steady wage growth.
- Tight labor market conditions and strong consumer spending momentum could slow down progress on inflation as the overall demand remains robust.
- In addition to that, commercial banks have not shown any sign of sharp contraction in credit despite tight lending standards.
- As inflationary pressures in excess of the 2% desired rate seem a hard nut to crack for Fed policymakers, the plot of “higher interest rates for longer” will keep Gold prices under pressure.
- As per the CME Group Fedwatch tool, traders see almost an 81% chance that interest rates will remain steady at 5.25%-5.50% at the November monetary policy meeting. Traders see a 64% chance for interest rates remaining unchanged for the remainder of the year.
- Lately, Fed policymakers, namely Minneapolis Federal Reserve Bank President Neel Kashkari and Boston Fed President Susan Collins, supported further policy tightening.
- Fed Collins said on Friday that a further rate hike is certainly not off the table. She further added that inflation can fall with only a modest rise in unemployment and that core services inflation excluding shelter has not yet shown a sustained improvement.
- The US economy is operating at full employment levels despite the Fed’s historically aggressive restrictive monetary policy. This may keep inflation sticky.
- Meanwhile, the US Dollar extends its winning spell as the American economy seems to be coping better than expected with the consequences of higher interest rates. The US Dollar Index (DXY) prints a fresh 10-month high at 106.32 amid global slowdown fears. 10-year US Treasury yields remain upbeat, above 4.5%, on hawkish interest rate outlook.
- The US Conference Board reported a decline in the Consumer Confidence Index to 103.0 in September from August’s reading of 108.7. The Conference Board commented that the decline in consumer confidence was visible among all age groups. Households seem worried about sticky consumer inflation, political uncertainty, and higher interest rates.
Technical Analysis: Gold price refreshes six-month low
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.