- Gold price rises for the straight third trading session due to easing US inflation.
- The US headline CPI rose at 3.2%, its slowest pace for two years.
- Investors await US Retail Sales, PPI, and the outcome of the Biden-Xi meeting.
Gold price (XAU/USD) extends rally as easing price pressures in the US economy have dented bets of further policy-tightening by the Federal Reserve (Fed). The precious metal capitalized on slow growth in the US headline inflation, which decelerated due to a sharp fall in gasoline prices. The soft US inflation report for October indicates that current interest rates set by the Fed are adequate to bring down inflation to 2%.
The US Dollar and bond yields are down as the soft Consumer Price Index (CPI) has underpinned a risk-on impulse. Easing consumer inflation has boosted confidence among investors in the possibility of early rate cuts by the Fed. Going forward, market participants will keenly watch monthly US Retail Sales data and the Producer Price Index (PPI) report for October.
Daily Digest Market Movers: Gold price rises on easing consumer inflation
- Gold price aims to extend recovery above $1,970.00 as a substantial decline in the US consumer inflation in October indicates that the Federal Reserve will likely not raise interest rates further.
- The US inflation data for October, released on Tuesday, indicated that headline inflation decelerated significantly. The annual headline CPI rose by 3.2%, softened from estimates of 3.3% and the former reading of 3.7%. This was the slowest growth in headline inflation in more than two years.
- A significant decline in the headline inflation rate was prompted by a sharp fall in global Oil prices.
- Rental prices continued to rise in October but at a slower pace than in September. Food and grocery prices expanded at a higher pace of 0.3%.
- Monthly core inflation, which takes out volatile Oil and food prices grew by 0.2% against estimates – and September’s growth rate – of 0.3%. Annual core inflation rose by 4.0%, decelerated from expectations and the prior release of 4.1%.
- Though core inflation declined more than expectations, the pace of decline was nominal, which indicates lingering stickiness. This remained a major concern for Federal Reserve policymakers last week, which forced them to lean toward raising interest rates further.
- Last week, Federal Reserve Chairman Jerome Powell commented that the central bank won’t hesitate in tightening monetary policy further as a failure to control inflation would be their biggest mistake.
- After the release of the US inflation data, Richmond Federal Reserve Bank President Thomas Barkin, speaking at an event in South Carolina, said the core inflation was partly offset by supply shortages.
- Thomas Barkin added that the central bank is making real progress on inflation but is not convinced inflation is on a smooth glide path back to its 2% target (for Core CPI). Barkin warned that the Fed needs to do more to curb demand and inflation.
- Latest inflation figures have turned the tide in favor of keeping interest rates unchanged by the Fed in the range of 5.25-5.50%. Economists hope that the Fed is done with hiking interest rates and that discussions about cutting interest rates will be early.
- The US Dollar Index (DXY) faced an intense sell-off after the release of the soft inflation report. The USD Index has refreshed its two-month low near 104.00 as easing inflationary pressures accelerated risk-taking. 10-year US Treasury yields fell sharply to 4.43%.
- Going forward, investors will focus on the monthly US Retail Sales data and Producer Price Index (PPI) for October, which will be published at 13:30 GMT.
- As per the consensus, the US Retail Sales contracted by 0.3% against an expansion of 0.7% in September. A sharp decline in consumer spending could keep pressure on the US Dollar.
- In addition to the US economic data, US President Joe Biden’s meeting with China’s President Xi Jinping at the White House will be keenly watched. Discussions about the Israel-Palestine war are widely anticipated.
- Gains in Gold could be limited due to risk-on mood and easing Middle East tensions.
Technical Analysis: Gold price climbs above $1,970
Gold price jumps close to $1,970.00 after the release of the soft US inflation report. The precious metal resumed its upside journey after discovering significant buying interest near the 50-day Exponential Moving Average (EMA). The recovery in Gold has been extended above the 20-day, which indicates that the broader appeal has turned extremely bullish.
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.