- Gold price trades sideways as investors shift focus to the speech from Fed Powell at Jackson Hole.
- The market mood remains jittery as to whether Jerome Powell will deliver hawkish interest rate guidance or favor a neutral policy.
- Business spending on capital goods rose by 0.1% in July, swinging from a contraction of 0.4% recorded for June.
Gold price (XAU/USD) faces an intense sell-off as Federal Reserve (Fed) Chair Jerome Powell remains hawkish at the Jackson Hole Symposium. The precious metal dropped significantly as Jerome Powell kept doors open for further policy tightening. About the labor market, Fed Powell conveys that the labor market is extremely tight and warrants more rates from the central bank.
Fed policymakers: Boston Fed Bank President Susan Collin and Philadelphia Fed Bank President Patrick Harker commented on Thursday that the current interest rate level is enough to do the required job. The US economy is still resilient due to a tight labor market and easing inflation, but further policy-tightening by the Fed could dampen market sentiment.
Daily Digest Market Movers: Gold price falls back as Fed Powell remains hawkish
- Gold price witnesses selling pressure as Fed Chair Jerome Powell’s commentary at the Jackson Hole Symposium remains hawkish.
- Jerome Powell said that Inflation has been too high, therefore, the process of bringing inflation down still has a long way to go despite more favorable recent readings.”
- The US Dollar Index (DXY) is aiming to extend its upside as Fed Powell keeps doors open for more interest rate hikes ahead.
- Fed Powell’s message about interest rates was clear that the central bank intended to hold rates at a restrictive level until confident inflation is moving sustainably down to 2%.
- On Thursday, strength in the US Dollar Index came from lower weekly jobless claims released on Thursday and deepening fears of a slowdown in the Chinese economy.
- The US Department of Labor reported on Thursday that individuals claiming jobless benefits for the first time rose to 230K, lower than expectations and the former reading of 240K for the week ending August 18.
- Gold price upside remains restricted as US Treasury yields rebounded after a downside move. The 10-year US bond yield recovered to near 4.26%.
- Meanwhile, Fed policymakers delivered neutral interest rate guidance on Thursday.
- Boston Fed President Susan Collins commented that interest rates are at a point where the Fed doesn’t need to raise them further. However, the option of further policy tightening will remain open.
- Philadelphia Fed Bank President Patrick Harker supports sustaining interest rates at the 5.25% to 5.5% range. Harker sees no rate cuts this year.
- US preliminary PMI for August reported by S&P Global on Wednesday indicated that the economy is losing its resilience due to higher interest rates and a deteriorating demand outlook.
- Vulnerable PMIs for August cast doubts over the growth rate in the third quarter. Firms are banking on lower operating capacity due to rising cost inflation.
- On Thursday, the US Census Bureau reported Nondefense Capital Goods Orders expanded by 0.1% in July as expected by investors, contracting from 0.4% in June.
- Going forward, investors will also focus on five-year consumer inflation expectations for August, which will be published at 14:00 GMT.
Technical Analysis: Gold price skids below $1,910
Gold price faces selling pressure as Fed Powell remains hawkish at the Jackson Hole Symposium. The precious metal struggles to continue its five-day winning spell amid a recovery in US Treasury yields. The yellow metal tussles with resistance to climb above the 20-day Exponential Moving Average (EMA) around $1,915.00 but has broken confidently above the 200-day EMA.
The Relative Strength Index (RSI) (14) has climbed into the 40.00-60.00 range, which indicates that the bearish impulse has faded.
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.