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Gold price falls back marginally from a five-month high as the focus shifts to Fed policy.
The Fed is widely expected to keep interest rates unchanged due to higher US bond yields.
Escalating Israel-Palestine war keeps bullions’ demand firmer.
Gold price (XAU/USD) delivered a moderate corrective move after printing a fresh five-month high. The precious metal slips marginally as investors turn cautious on expectations that the Federal Reserve (Fed) will keep its doors open for further policy tightening and maintain the dialogue of ‘higher for longer interest rates’. The near-term outlook for bullion remains upbeat amid deepening Middle East tensions.
The Israeli army prepares for a ground invasion in Gaza to demolish the Palestinian military while the US keeps urging the former to delay a ground assault as it could impact the hostage situation. Neighboring Jordan warned that Israel’s ground war in Gaza would result in a humanitarian catastrophe of epic proportions. Going forward, investors will look for the UN Security Council meeting to discuss potential solutions for a ceasefire in the Israel-Palestine conflict.
Daily Digest Market Movers: Gold price edges down ahead of Fed policy
Gold price edges down from a five-month high near $2,010.00 as investors await the monetary policy decision by the Federal Reserve, which will be announced on Wednesday.
The near-term demand for the Gold price remains upbeat as Middle East tensions keep safe-haven bids firmer.
The US urged Israel to delay ground invasion in Gaza as it could derail hostage negotiations.
Investors await the United Nations (UN) Security Council meeting, requested by the UAE, to discuss potential ground assault by Israel in Gaza, which could lead to plenty of casualties.
An official from the Palestinian military has requested the immediate implementation of a UN general assembly decision to allow aid to the Gaza strip.
The US Dollar Index (DXY) consolidates in a tight range as investors keenly await the Fed’s interest rate decision.
As per the CME Fedwatch tool, traders see the Fed keeping interest rates unchanged at 5.25-5.50% almost certain. The odds of one more interest rate increase in any of the two remaining monetary policy meetings in 2023 have risen to 24% from 20% recorded last week.
Tight financial conditions due to higher US long-term bond yields, moderately easing price pressures and deepening Middle East tensions are expected to allow Fed policymakers to maintain the status-quo consecutively for the second time.
Cleveland Fed Bank President Loretta Mester said recently that higher bond yields are equivalent to one interest rate hike of 25 basis points (bps). The Fed could use higher Treasury yields as a substitute for further policy tightening.
10-year US Treasury yields have risen to 4.85% and are expected to expand further amid budget deficit worries.
The core Personal Consumption Expenditure (PCE) inflation data released on Friday showed that inflation is broadly stubborn due to robust consumer spending.
Monthly US core PCE accelerated at an expected pace of 0.3% in September against 0.1% growth in August. The annual core PCE rose by 3.7% but decelerated from August reading of 3.9%.
In addition to the Fed’s monetary policy decision, investors would look for ADP Employment Change and the ISM Manufacturing PMI for October, which will be published on Wednesday.
The release of the US factory data will be of utmost importance. A survey from S&P Global showed last week that the US Manufacturing PMI met the 50.0 threshold for the first time after 11 months. 50 is the threshold distinguishing expansion from contraction. If the US factory data manages to do so, the Fed will probably discuss keeping interest rates higher for a much longer period.
Technical Analysis: Gold price consolidates below $2,000
Gold price falls nominally from five-month high of $2,009 as investors remain concerned about the interest rate guidance from the Fed, which will be delivered on Wednesday. The precious metal stabilizes above the crucial resistance of around $1,990, which is now acting as a major support for the Gold bulls. The broader Gold demand outlook turns bullish as the 20-day Exponential Moving Average (EMA) has delivered a bullish crossover above the 50 and 200-day EMAs.
Fed FAQs
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.
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