- Gold price falls on easing geopolitical tensions and hawkish remarks from Fed Powell on interest rates.
- US core inflation is seen growing at a steady pace.
- A slowdown in the progress of taming inflation could elevate hawkish Fed bets.
Gold price (XAU/USD) has fallen to around $1,940 and it is exposed to more downside amid multiple headwinds. The precious metal loses shine due to no significant escalation in Middle East tensions, hawkish messages from Federal Reserve (Fed) Chair Jerome Powell and his colleagues, and uncertainty ahead of the US Consumer Price Index (CPI) data for October, which will be published on Tuesday.
The appeal for Gold diminished significantly after Jerome Powell said he was less confident that the current interest rate policy is sufficiently restrictive to get inflation under control. Further action in the US Dollar, bond markets and the Gold price will be guided by US inflation data, which will dictate whether more interest rate hikes are needed.
Daily Digest Market Movers: Gold price weakens ahead of US inflation data
- Gold price trades inside Friday’s range as investors swing towards the US inflation data for October, which will be released on Tuesday.
- The US consumer inflation is expected to provide cues about the monetary policy action by the Federal Reserve in its last meeting of 2023 in December.
- For October’s inflation data, the headline inflation is seen growing 0.1% on a monthly basis against 0.4% growth in September. The monthly and annual core CPI data expanded at a steady pace of 0.3% and 4.1%, respectively.
- Persistent inflation data may deepen expectations of one more rate hike from the Fed in December, which would raise interest rates to 5.50%-5.75%. Still, markets broadly expect the Fed to keep rates unchanged.
- Last week, Fed Chair Jerome Powell and his colleagues conveyed that their job towards taming inflation is not over yet. Powell is not confident that current interest rates are adequate to tame price pressures.
- Jerome Powell warned that a failure in getting inflation under control would be the biggest mistake of the central bank. He further said that the central bank will not hesitate to raise interest rates further if needed to ensure the progress in inflation easing towards 2%.
- St. Louis Fed interim President Kathleen O’Neill Paese supported hawkish remarks from Jerome Powell, and said “It would be unwise to suggest that further rate hikes are off the table”. Paese emphasized the need to wait for additional economic and inflation figures before contemplating an interest rate increase.
- While San Francisco Fed Bank President Mary Daly and Richmond Fed Bank President Thomas Barkin remained unsure about raising interest rates. Daly commented that it would be too early to declare victory over inflation and echoed the need to raise interest rates further.
- Part of the reason why Fed policymakers are not actively supporting more interest rate hikes is the higher US long-term bond yields, which have significantly contributed in tightening financial conditions further.
- While Fed policymakers lean towards raising interest rates further, investors still see no rate hike in December.
- As per the CME Group Fedwatch tool, traders see a 15% chance of the Fed raising interest rates by 25 basis points (bps) at the December meeting.
- Meanwhile, no significant escalation in the Israel-Palestine war has diminished the appeal for Gold significantly. Israeli Prime Minister Benjamin Netanyahu continues to reject any ceasefire proposal as Hamas denies releasing all hostages.
- The US Dollar Index (DXY) continues to face pressure near 106.00 as investors hope that the Fed could start the rate-cutting cycle in mid-2024.
- Economists at Morgan Stanley projected that the Fed will initiate easing monetary policy from June 2024. These cuts are expected to come in 25 bps declines, eventually bringing the policy rate down to 2.375% by the end of 2025.
Technical Analysis: Gold price corrects to near 50-EMA below $1,940
Gold price struggles for a direction ahead of the US consumer inflation data for October. The near-term demand for the precious metal remains downbeat due to multiple headwinds.
On a daily time frame, the correction in Gold price has extended to near the 50-day Exponential Moving Average (EMA), which trades around $1,940.00. Next support for the yellow metal is seen near the 200-day EMA, which hovers near $1,915.00.
Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.
Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.