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    Gold price jumps as Fed sees progress in inflation declining towards 2%

    Source Fxstreet
    Feb 19, 2024 09:46
    • Gold price extends its recovery in a holiday-shortened week.
    • The US PPI rose strongly in January but this was put down to seasonally adjusted fluctuations.
    • Fed Bostic sees two rate cuts this year commencing from summer.

    Gold price (XAU/USD) continues its winning spell for the third session in a row on Monday despite waning expectations of rate cuts by the Federal Reserve (Fed) before the June monetary policy meeting. The precious metal maintains strength even though sticky Consumer Price Index (CPI) and Producer Price Index (PPI) data for January have prompted prospects of persistent core Personal Consumption Expenditure price index (PCE) data.

    Investors believe that the reasoning behind higher Gold price is less significant PPI data for January as prices moved up due to some seasonal adjustment problems. In addition to that, Fed policymakers have considered the surprise rise in the latest consumer price inflation data as a one-time blip, emphasizing the longer trend, which indicates that inflation is moving decisively down.

    Meanwhile, the forecast from Atlanta Federal Reserve Bank President Raphael Bostic that progress in underlying measures of inflation could allow the Fed to start reducing interest rates from summer has eased opportunity cost of holding non-yielding assets such as Gold. 

    Daily Digest Market Movers: Gold climbs for third session while US Dollar falls to weekly low

    • Gold price advances strongly to $2,020 as the US Dollar remains under pressure, although hotter-than-anticipated PPI data for January has cooled down expectations of rate cuts for May monetary policy meeting by the Federal Reserve.
    • The CME FedWatch tool indicates that trades see a steady interest rate decision in the March and May monetary policy meetings. The Fed is expected to cut interest rates by 25-basis points (bps) in the June policy meeting.
    • Stronger consumer price inflation and PPI data for January have pushed back expectations of Fed rate-cuts before June.
    • Sticky price pressures have bought more time to the Fed to reassess the need of rate cuts. Premature rate cuts could dent the efforts yet made in taming inflation from its historic highs to where it is now by flaring it up again.
    • Higher-than-projected CPI and PPI data have deepened fears of escalating core PCE price index data for January – the preferred gauge for Fed policymakers for preparing monetary policy remarks.
    • Atlanta Fed Bank President Raphael Bostic said he was a little surprised by recent inflation data, but broader progress in the fight against inflation has opened doors for rate cuts in the summertime.
    • However, Raphael Bostic reiterated the need for good inflation data in the coming months to be convinced that inflation is truly falling. Bostic sees two rate cuts in 2024.
    • Meanwhile, the US Dollar Index (DXY), which gauges the Greenback’s value against six rival currencies, has declined to 104.20 ahead of a holiday-truncated week in the US economy. The US markets will remain closed on Monday because of President’s Day.
    • This week, investors will focus on the Federal Reserve Open Market Committee (FOMC) minutes for January’s policy meeting, which will be released on Wednesday.
    • The FOMC minutes will provide a detailed explanation behind keeping key rates unchanged in the range of 5.25%-5.50% in January and fresh outlook on interest rates.
    • Apart from that, investors will focus on the preliminary S&P Global Manufacturing PMI for February, which will be published on Thursday.

    Technical Analysis: Gold price recovers to near 20-day EMA

    Gold price extends its recovery for the third straight trading session even though the Fed is maintaining its hawkish rhetoric due to sticky price pressures. The precious metal reverses to the 20-day Exponential Moving Average (EMA), which trades around $2,022. The outlook for the Gold price could turn bullish if it manages to sustain above the 20-day EMA. 

    The downward-sloping trendline from December 28 high at $2,088 may continue to act as a barrier for the Gold price. The 14-period Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, which shows a sideways outlook for the Gold price.

    Gold FAQs

    Why do people invest in Gold?

    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.

    Who buys the most Gold?

    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.

    How is Gold correlated with other assets?

    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.

    What does the price of Gold depend on?

    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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