Gold starts 2024 on a firm-footing on persistent rate-cut hopes
- Gold price moves higher as Fed’s rate-cut bets persist.
- This week, the US NFP and ISM PMI reports will guide further action in the FX domain.
- The US Dollar advances further ahead of crucial economic data.
Gold price (XAU/USD) kicks-off the 2024 year on a promising note, demonstrating a firm-footing on Tuesday amid prospects of a reduction in interest rates by the Federal Reserve (Fed) starting in March. Factors that are boosting rate-cut hopes are significant progress in the underlying inflation declining towards 2% and easing labour market conditions due to restrictive monetary policy stance. The precious metal faces marginal sell-off as the US Dollar has advanced further. The USD Index has refreshed weekly high to near 102.00 and 10-year US TReasury yields have climbed to near 3.96%.
This week, investors should brace for sheer volatility as various economic indicators are lined-up for release. The ISM manufacturing PMI, JOLTS Job Openings data and Federal Open Market Committee (FOMC) minutes of December monetary policy meeting will be followed by Services PMI and the Nonfarm Payrolls (NFP) report. Market participants are unlikely to change broader bearish stance for the US Dollar and Treasury yields amid deepening rate-cut expectations by the Fed.
Daily Digest Market Movers: Gold price surrenders some gains as US Dollar advances
- Gold price faces nominal sell-off near $2,075 amid further recovery in the US Dollar.
- The broader prospects are still upbeat on higher likelihood of early rate cuts by the Federal Reserve in 2024.
- As per the CME FedWatch tool, there is a 72% chance that the Fed will reduce interest rates by 25 basis points (bps) to 5.00-5.25%. The probability that the Fed will continue reducing rates in May is similar at 72%.
- The appeal for the Gold price has strengthened after Federal Reserve Chairman Jerome Powell changed his tone at the December monetary policy meeting from one that backs higher for longer interest rates to one that sees rate cuts being a topic for discussions going forward.
- However, Jerome Powell warned that the achievement of price stability is the Fed’s foremost objective.
- Investors should be prepared for volatile price action as the labour market, Manufacturing and Services PMI data are due this week. In addition to that, investors will focus on the FOMC minutes, which are set to be released on Wednesday.
- As per the estimates, the Institute of Supply Management (ISM) is expected to report Manufacturing PMI for October at 47.1, higher than the former reading of 46.7.
- A figure below the 50.0 threshold is considered a contraction in economic activity and this would be the 14th straight contraction in the US factory data.
- The US Bureau of Labor Statistics is scheduled to report JOLTS Job Openings data for November, which will also be released on Wednesday. Jobs posted by US employers were 8.850M, higher than the prior demand of 8.733M.
- A major focus for investors will be the FOMC minutes. The FOMC minutes will provide a detailed explanation behind keeping interest rates unchanged in the range of 5.25-5.50% for the third time in a row. Apart from that, investors will be focused on guidance for interest rates in 2024 and detailed projections for inflation and labour market conditions.
- Meanwhile, the US Dollar Index (DXY) has advanced to near 102.00 on Tuesday. In 2023, the USD Index ended its winning streak since 2020 on firmer rate-cut bets.
- This week, action in the USD Index will be guided by the labour market data, which is scheduled for Friday. But before that, market participants will focus on the US Automatic Data Processing (ADP) private payrolls data, which will be published on Thursday.
- As per the consensus, US private employers are expected to have hired 113K job-seekers in December, against hiring of 103K individuals in November.
Technical Analysis: Gold price drops to near $2,070
Gold price climbs above Friday’s high, supported by expectations of early rate cuts by the Fed. The precious metal surrenders some gains amid decenyt recovery in the US Dollar. The precious metal is expected to extend further towards the previous week’s high near $2,090. The broader appeal for the Gold price is extremely bullish as short-to-long term Exponential Moving Averages (EMAs) are sloping higher.
Meanwhile, momentum oscillators have shifted into the bullish trajectory, indicating more upside ahead.
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.