- Gold price faces a sell-off as investors remain cautious over the speech from Fed Powell.
- The majority of Fed policymakers have advised waiting for more data for a fresh outlook on interest rates.
- The US Dollar could rebound as global slowdown fears escalate.
Gold price (XAU/USD) falls further as upside risks of Middle East tensions ease. The precious metal remains on the backfoot as market participants expect conflicts to remain contained between Israel and Palestine. Along with fading Middle East conflicts, caution over the interest rate outlook from the Federal Reserve (Fed) has dampened appeal for the Gold.
Investors are waiting for Federal Reserve Chairman Jerome Powell’s guidance on the monetary policy meeting in December and the outlook on the economy. Fed Powell is expected to maintain the stance of keeping current interest rates higher for a longer period as cracks appear in the US job market that could restrict inflation expectations. Jerome Powell could warn for more rate hikes in case progress in inflation returns to 2% slows.
Daily Digest Market Movers: Gold price refreshes three-week low
- Gold price tests territory below the crucial support of $1,950 as market participants hope that Middle East tensions will remain contained between Israel and Palestine.
- The delay in ground invasion plans by the Israeli Defense Forces (IDF) in Gaza, for the safe delivery of humanitarian aid and to ensure safe passage for hostages, has also diminished the appeal for Gold.
- On Tuesday, Federal Reserve Governor Lisa Cook warned about escalating geopolitical tensions, which could deepen the slowdown in Europe and China and its cascading effects could impact the US economy too.
- Lisa Cook further warned that these geopolitical tensions could destabilize commodity markets and access to credit in the current higher interest rate environment.
- This week, the Gold price closed negative for straight three trading sessions and is expected to remain vulnerable.
- The majority of Fed policymakers in their commentaries have advised to wait for the release of key economic data before arriving at a conclusion.
- Philadelphia Federal Reserve President Patrick Harker said that the next decision from the central bank could go either way, depending on economic data. Harker added that the Fed will keep interest rates ‘higher for longer’ and there are no signs of rate cuts in the near term.
- While discussing the labor market and inflation outlook, Patrick Harker commented that the Unemployment Rate would rise to 4.5% in 2024 before falling and inflation will come down to 3% in 2024.
- Minneapolis Federal Reserve Bank President Neel Kashkari and Federal Reserve Governor Michelle Bowman support raising rates as the resilient US economy could result in an uptick in price pressures.
- On the contrary, Chicago Federal Reserve President Austan Goolsbee said that the progress in inflation returning towards 2% is decent and inflation would decline significantly in the next two months.
- Austan Goolsebee said that discussions over how far interest rates should be hiked will likely fade and be substituted by how long interest rates should remain high.
- Further action in the US Dollar, bullions, and bond market are likely to be guided by the speech from Fed Chair Jerome Powell. The guidance on interest rates and commentary on the economic outlook from Powell will be keenly watched.
- On Wednesday, Jerome Powell, in his prepared remarks, didn’t comment on monetary policy and the economic outlook.
- Meanwhile, the US Dollar Index (DXY) consolidates in a narrow range around 105.50. The USD index could resume upside as fears of a slowdown in the global economy have accelerated. The Chinese economy deflated in October due to weak consumer spending and a surprise slump in factory data.
Technical Analysis: Gold price dips below $1,950
Gold price continues its three-day losing streak as investors remain cautious ahead of Powell’s commentary on interest rates. The Gold price corrects further below the 20-day Exponential Moving Average (EMA) but is likely to find support near the 50-day EMA, which trades near $1,935.00. Momentum oscillators indicate that the bullish impulse has faded but the broader trend is still upbeat.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.