Gold price stays firm as Fed holds rates and tilts hawkish

Source Fxstreet
Jun 12, 2024 18:17
  • Gold trades at $2,335 as lower-than-expected US inflation boosts rate cut speculation, but Fed holds rates steady.
  • Fed’s statement highlights a cautious approach to rate cuts, with inflation projections for 2024 edging higher.
  • US 10-year Treasury yield drops 14 basis points to 4.266%, while DXY falls 0.83% to 104.38, supporting gold prices.

Gold prices climbed on Wednesday following a lower-than-expected inflation report in the United States (US), which increased the odds of a Federal Reserve (Fed) interest rate cut later in the year. Nevertheless, the Federal Reserve decided to keep rates unchanged at its meeting and revised lower interest rate cut expectations for 2024, tilting hawkish. The XAU/USD trades at $2,335, gains 0.81%.

In its monetary policy statement, the Fed mentioned they do “not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.” They added that “the Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.”

Aside from this, the so-called ‘dot-plot’ showed that the median of the Fed officials upward revised their projections of the federal funds rate from 4.6% to 5.1%, toward the end of 2024. This means they are foreseen just one rate cut, compared to the current effective federal funds rate standing at 5.33%.

Federal Reserve officials updated their economic projections for 2024. According to the Summary of Economic Projections (SEP), they expect the economy to grow 2.1%, as foreseen in March, while the Unemployment Rate is estimated at 4%, unchanged from the previous SEP. PCE inflation is expected to edge higher from 2.4% to 2.6%, and Core PCE to rise from 2.6% to 2.8%.

Earlier, the US Bureau of Labor Statistics (BLS) revealed that May’s inflation in the US was unchanged compared to April’s data, strengthening the golden metal as US Treasury bond yields plunged. The Greenback tumbled to a three-day low, as revealed by the US Dollar Index (DXY), which measures the performance of the buck’s value against a basket of six other currencies.

The US 10-year Treasury note yield edges down 14 basis points to 4.266%, a tailwind for the yellow metal. Consequently, the DXY plummeted 0.83% to 104.38.

According to the CME FedWatch Tool, the latest US inflation report increased the odds of a Fed rate cut in September from 46.7% to 61.3%.

Daily digest market movers: Gold price stays firm post Fed’s decision

  • US Consumer Price Index (CPI) remained unchanged at 0% MoM, falling short of the 0.1% monthly estimate and April's 0.3% increase. Over the twelve months leading to May, the CPI rose by 3.3%, below both April's figure and the 3.4% consensus.
  • Core inflation figures decreased from 0.3% to 0.2% MoM. Annually, core inflation was 3.4%, which was lower than expected 3.5% and April's 3.6%.
  • On Tuesday, the NFIB Small Business Optimism Index for May hit its highest level of the year. The survey highlighted that businesses struggle with inflation and access to cheap financing.
  • December’s 2024 fed funds futures contract hints that investors expect 28 basis points of rate cuts by the Fed through the end of the year.
  • News that the People’s Bank of China paused its 18-month bullion buying spree weighed on the precious metal. PBOC holdings held steady at 72.80 million troy ounces of Gold in May.

Technical analysis: Gold price rises as buyers target $2,380

Gold remains neutral to downwardly biased after forming a Head-and-Shoulders chart pattern. Although it hints that the non-yielding metal could be headed to the downside, the Fed’s decision could negate the chart pattern if XAU/USD climbs past the June 7 cycle high of $2.387, opening the door to test the $2,400 mark.

Conversely, if XAU/USD drops below the $2,300 figure, the next demand area would be the May 3 low of $2,277, followed by the March 21 high of $2,222. Further losses lie beneath, as sellers would eye the Head-and-Shoulders chart pattern objective at around $2170 to $2160.

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.

 

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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