Gold price struggles to sustain as impact of high Fed’s rate cut bets fade

Gold price falls back $2,065 as the impact of deep Fed rate cut hopes start fading away.
The Fed is expected to start cutting interest rates from March 2024.
Next economic triggers for the Gold price will be US Employment and Manufacturing PMI data.

Gold price (XAU/USD) has extended its correction but a consolidation is likely ahead due to thin trading activity. Broadly, the precious metal may continue to remain in the positive trajectory as bets in favour of early rate cuts by the Federal Reserve (Fed) are  firming due to easing labour market conditions and a clear downtrend in the underlying inflation. This lowers the opportunity cost of holding the yellow metal and weakens the US Dollar, in which it is priced. 

The Gold price is set to end 2023 with stellar gains of more than 13.50%. Deepening expectations for the Fed to start reducing interest rates from March 2024 will also keep appeal for the Gold price upbeat in 2024. Further action in the Gold price will be guided by the United States Nonfarm Employment and ISM Manufacturing PMI for November.

Daily Digest Market Movers: Gold price drops while US Dollar, yields recover

Gold price falls further to near $2,063.00 as the US Dollar and Treasury yields have recovered further.
The 10-year US Treasury yields have rebounded to near 3.90% and the US Dollar Index (DXY) has climbed to near 101.35.
The broader appeal for non-yielding assets is bullish as Fed’s stance of higher for longer interest rates has lost its essence and investors are pricing in early rate cuts in 2024.
As per the CME Fedwatch tool, there is a 73% 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 borrowing rates in May too is 72%.
In addition, a clear declining trend in the underlying inflation towards 2%, further increases the chances the  Fed may cut interest rates to avoid the consequences of overtightening.
The scenario of long-lasting restrictive monetary policy could impact the economic outlook of the US economy.  
The US Department of Labor reported higher-than-projected Initial Jobless Claims (IJC) for the week ending December 22. Individuals who claimed jobless benefits for the first time were 218K, higher than the consensus of 210K and the former reading of 206K. 
The Fed has been maintaining an unchanged interest rates stance from the last three monetary policy meetings due to softening inflation and a slowdown in labour demand. A sustained restrictive monetary policy stance for longer could ease out resilience in the US labour market.
While Fed policymakers are confident of a clear downtrend in price pressures, a restrictive policy stance would be maintained to ensure the achievement of price stability.
Significant action in the FX domain is less likely on Friday amid the festive mood. However, next week, US Manufacturing PMI from the Institute of Supply Management (ISM) and the Employment data for November.
Fresh labour market conditions will indicate whether Fed policymakers should look for unwinding restrictive monetary policy stance or stick to higher interest rates further.

Technical Analysis: Gold price turns sideways around $2,060

Gold price drops below Thursday’s trading range of $2,064-2,088. Trading volume is thin amid absence of significant number of market participants due to the festive week. The precious metal witnessed some profit-booking on Thursday. On a braoder note, upward-sloping 20 and 50-day Exponential Moving Averages (EMAs) point to more upside ahead. In addition to them, oscillators indicate strong momentum in an upside direction.

Gold FAQs

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.

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