XAU/USD reverses Fed Minutes inspired gains, $1,735 in focus

others

Gold rallies on Middle East tensions, firm Fed rate cuts and soft US PPI – Crypto News

Published

3 years ago

January 12, 2024

Dripp

Gold price climbs slightly above $2,050 as investors are optimistic about Fed rate cuts.
Investors ignore United States’ high consumer inflation data while US PPI remains soft.
Fed policymakers reiterate a restrictive monetary policy stance to achieve price stability.

Gold price (XAU/USD) delivers a swift recovery as investors are confident about an interest rate cut by the Federal Reserve (Fed) at its monetary policy meeting on March 20 – such a move would support non-yielding assets such as Gold. The probabilities of an early interest rate cut are assessed as firmer despite consumer price inflation in the United States remaining stubbornly high in December, amid a significant increase in rental prices and healthcare costs.

Meanwhile, soft US Producer Price Index (PPI) numbers for December and deepening Middle East tensions have improved near-term demand for bullions. Monthly headline PPI continues to contract by 0.1% against expectations of 0.1% growth. The annual headline PPI accelerated at a slower pace of 1.0% while investors projected a 1.3% growth against 0.8% increase in November. The monthly core PPI continues to remain stagnant against a 0.2% growth projection while prices of core goods and services at factory gates were decelerated to 1.8% versus. consensus of 1.9% and the former reading of 2.0%.

Tensions in Middle East have deepened as the US & UK military have launched airstrikes on Houthi targets in Yemen in retaliation for attacking merchant vessels shipping from Red Sea.

While market participants continue to commit funds toward Gold amid optimism over early rate cuts, Fed policymakers will stick to a restrictive interest rate stance as price pressures in addition to the required rate of 2% are highly sticky, due mainly to stable labor market conditions. Fed policymakers have been reiterating that a lot of work has yet to be done in order to gain confidence that the underlying inflation will return to 2% in a sustainable manner.

Bank of Chicago Federal Reserve President Austan Goolsbee, on Thursday, stressed a data-dependent approach and said that there were weeks and months of data to come, to help guide when and how much rates should be reduced. Cleveland Fed President Loretta Mester said she needed more evidence to confirm inflation declining towards 2% in a timely manner before jumping on the bandwagon of rate-cut discussions.

Daily Digest Market Movers: Gold price strengthens as appeal for bullions improve

Gold price moves sharply higher, close to $2,040 as investors remain optimistic about a rate cut by the Federal Reserve in March despite a healthy increase in the headline inflation and sticky core CPI data for December.
The annual core inflation rate decelerated slightly to 3.9% (from 4.0% in November) while headline CPI rose significantly to 3.4% due to elevated rentals and healthcare costs. Gasoline and food prices were up at a moderate pace of 0.2%.
According to the CME FedWatch tool, chances lean towards an interest rate cut by 25 basis points (bps) in March, with a probability of above 66%.
Investors are ignoring the fact that US labor market conditions are still healthy and the last mile in achieving price stability is turning out extremely stubborn. This could allow Fed policymakers to maintain arguments towards keeping interest rates elevated, at least until the second quarter ends.
Stubbornly higher US inflation has set a hawkish undertone for the first interest rate policy of 2024 on January 31.
The Fed is widely anticipated to keep interest rates unchanged in the range of 5.25-5.50% for the fourth straight time, but the outlook for interest rates in March is expected to remain slightly hawkish.
After Fed policymakers: Raphael Bostic and John Williams, Cleveland Fed President Loretta Mester said March is probably too early for an interest rate cut decision as the Fed needs to see more evidence to be confident that inflation is progressively declining towards 2%.
Loretta Mester added that there is more work to do including the continued maintenance of a restrictive monetary policy. She further added that goods, housing and shelter costs need to ease further along with a slowdown in wage growth.
The US Dollar Index (DXY) struggles for a firm-footing as investors are not ready to ditch support for rate cuts in March.

Technical Analysis: Gold price climbs above $2,050

Gold price delivers a V-shape recovery after printing a fresh three-week low below $2,015. The 50-day Exponential Moving Average (EMA) has acted as a strong support for the Gold price bulls. The precious metal has managed to climb slightly above the 20-day EMA, which trades around $2,036. While the upside bias is intact, a bullish momentum has faded as the 14-period Relative Strength Index (RSI) is oscillating near 50.00.

Inflation FAQs

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.