Gold slumps amid uncertainty ahead of US core PCE Price Index – Crypto News – Crypto News
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XAU/USD reverses Fed Minutes inspired gains, $1,735 in focus XAU/USD reverses Fed Minutes inspired gains, $1,735 in focus

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Gold slumps amid uncertainty ahead of US core PCE Price Index – Crypto News

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  • Gold price tumbles ahead of the US core PCE Price Index data.
  • The underlying inflation data will shape the interest rate outlook.
  • Fed’s Collins expects the Fed’s path to 2% inflation will be bumpy.

Gold price (XAU/USD) faces selling pressure in Thursday’s European session ahead of the United States core Personal Consumption Expenditure Price Index (PCE) for January, which will be published at 13:30 GMT. The underlying inflation data will guide the precious metal as it will provide a fresh interest rate outlook. The underlying inflation data will indicate whether Federal Reserve (Fed) policymakers are getting evidence, which could convince them that inflation will sustainably return to the 2% target.

Fed policymakers won’t be interested in lowering interest rates if price pressures remain stubborn. This would improve the appeal of the US Dollar and bond yields. The US Dollar generally attracts higher foreign inflows when the Fed maintains hawkish guidance on interest rates.

The market expectations for rate cuts in the March and May policy meetings are not expected to heighten significantly even if the inflation report turns out softer. Fed policymakers need good inflation data for months to consider a change in the monetary policy stance. Therefore, one good progressively declining inflation data point would not be enough to force policymakers to swiftly unwind their restrictive policy stance.

Daily Digest Market Movers: Gold price comes under pressure while US Dollar rebounds

  • Gold price falls sharply to $2,030 ahead of United States core PCE Price Index data for January.
  • Market participants will pay close attention as it is the Fed’s preferred inflation tool. It doesn’t get distorted by base effects and provides a clear view of underlying inflation by excluding volatile items.
  • Economists forecast underlying inflation data to decelerate to 2.8% from 2.9% in December on a year-on-year basis. The monthly core PCE Price Index data is forecast to have increased by 0.4% against a moderate growth of 0.2% in December.
  • The economic data is expected to significantly impact market expectations for the timing of Federal Reserve rate cuts.
  • Ahead of the underlying inflation data, the CME FedWatch Tool shows that interest rates will remain unchanged in the range of 5.25%-5.50% in the next two policy meetings, which will take place in March and May. Traders see a 53% chance for a rate cut by 25 basis points in the June meeting.
  • The opportunity cost of holding non-yielding assets, such as Gold, would increase if the inflation data remains stubborn. Therefore, hawkish commentaries from Fed policymakers have been maintaining downward pressure on the Gold price.
  • On Wednesday, New York Federal Reserve President John Williams said the decision on rate cuts will be dependent on incoming data. Williams added that the central bank has come a long way to bring down inflation to the 2% target, but there is more work to do.
  • Boston Fed Bank President Susan Collins sees the Fed’s path returning to 2% as bumpy due to tight labor market conditions and higher inflation readings in January. Collins expects that the Fed will start reducing interest rates later this year.

Technical Analysis: Gold price dips to $2,030

Gold price faces a sell-off but remains inside Wednesday’s trading range in Thursday’s European session. The broader trend of the precious metal is sideways, trading in a Symmetrical Triangle, which could break out in either direction. However, the odds marginally favor a move in the direction of the trend before forming the triangle – in this case, up. A decisive break above or below the triangle boundary lines would indicate a breakout is underway. 

The downward-sloping border of the Symmetrical Triangle pattern is plotted from the December 28 high at $2,088, and its upward-sloping border from the December 13 low at $1,973.

The 14-period Relative Strength Index (RSI) remains confined in the 40.00-60.00 range, indicating a sideways trend.

Fed FAQs

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 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.

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.

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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