Gold price (XAU/USD) drops from fresh all-time highs around $2,220 in Thursday’s early American session as US Dollar and US Treasury yields rebound strongly. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rebounds to 103.50 after a decline seen post-release of the Federal Reserve's (Fed) dot plot. It seems that upwardly revised forecasts for the Gross Domestic Product (GDP) and the annual Core Personal Consumption Expenditure Price Index (PCE) for 2024 have limited the US Dollar’s downside. An improving US economic outlook bodes well for the US Dollar. 10-year US Treasury yields rebound to 4.27% as the Fed refrains from providing any concrete timing for Fed rate cuts.
Earlier, the Gold price refreshes all-time highs as speculation over Fed rate cut hopes for June escalated after the quarterly updated dot plot of March’s policy meeting showed that three rate cut projections for this year remain on the table. Comments from Fed Chair Jerome Powell also helped to firm demand for Gold. Powell said policymakers are confident that underlying inflation is easing despite sticky February’s inflation numbers. Firm expectations for the Fed reducing interest rates diminish the opportunity cost of holding investment in non-yielding assets such as Gold.
Gold price dips below $2,180 from all-time highs around $2,220. The short-term demand for the Gold price is extremely bullish as the 20-day Exponential Moving Average (EMA) at $2,137 is sloping higher vertically.
The Gold price is trading in unchartered territory but could face resistance near the 161.8% Fibonacci extension level at $2,250. The Fibonacci tool is plotted from December 4 high at $2,144.48 to December 13 low at $1,973.13. On the downside, December 4 high at $2,144.48 will be a major support for the Gold price bulls.
The 14-period Relative Strength Index (RSI) oscillates in the bullish range of 60.00-80.00, 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.