- Gold price faces an intense sell-off as Fed’s hawkish stance strengthens the US Dollar.
- The US economy has remained resilient on the grounds of a tight labor market and robust household demand.
- Investors await the US Durable Goods Orders to put some light on the manufacturing sector’s outlook.
Gold price (XAU/USD) hits a fresh monthly low as pressure from a strong US Dollar and high Treasury yields deepens after Federal Reserve (Fed) policymakers see further policy-tightening appropriate. The precious metal skids below the crucial support of $1,900.00 as excess inflationary pressures seem stickier than expected and may encourage the Fed to keep interest rates elevated for a longer period than projected.
Meanwhile, the upbeat United States Durable Goods Orders report for August also built pressure on the Gold price. New Orders expanded by 0.2% while investors anticipated a contraction of 0.5%. In the July month, fresh orders for core goods were contracted by 5.6%.
A hawkish commentary from Minneapolis Federal Reserve Bank President Neel Kashkari is expected to keep the Gold price on the back foot. Fed Kashkari said that there was a risk interest rates might have to go higher but added that it was hard to know. On Monday, Fed Governor Kashkari said that the central bank will likely need to raise interest rates further and keep them elevated for some time to bring down inflation to 2%. “If the economy is fundamentally much stronger than we realized, on the margin, that would tell me rates probably have to go a little bit higher, and then be held higher for longer to cool things off,” he added, as reported by Reuters.
The US economy has remained resilient on the grounds of tight labor market conditions and strong consumer spending, but the manufacturing sector has been a major headwind. A revival in the Manufacturing PMI could strengthen the US economy further. For more guidance on factory activity, investors will focus on the US Durable Goods Orders data, which will draw some light on the manufacturing sector outlook.
Daily Digest Market Movers: Gold price drops further on upbeat Durable Goods Orders
- Gold price continues its two-day sell-off, dropping to over one-month low near $1,895 as US economic resilience stems concerns of a rebound in inflation.
- US inflation, measured by the Core Consumer Price Index, has softened from its peak of 6.6% to 4.3% in August, pressured by the Federal Reserve’s aggressive rate-tightening cycle. The last leg of high inflation seems stubborn due to robust consumer spending and steady wage growth.
- Tight labor market conditions and strong consumer spending momentum could slow down progress on inflation as the overall demand remains robust.
- In addition to that, commercial banks have not shown any sign of sharp contraction in credit despite tight lending standards.
- As inflationary pressures in excess of the 2% desired rate seem a hard nut to crack for Fed policymakers, the plot of “higher interest rates for longer” will keep Gold prices under pressure.
- As per the CME Group Fedwatch tool, traders see almost an 81% chance that interest rates will remain steady at 5.25%-5.50% at the November monetary policy meeting. Traders see a 64% chance for interest rates remaining unchanged for the remainder of the year.
- Lately, Fed policymakers, namely Minneapolis Federal Reserve Bank President Neel Kashkari and Boston Fed President Susan Collins, supported further policy tightening.
- Fed Collins said on Friday that a further rate hike is certainly not off the table. She further added that inflation can fall with only a modest rise in unemployment and that core services inflation excluding shelter has not yet shown a sustained improvement.
- The US economy is operating at full employment levels despite the Fed’s historically aggressive restrictive monetary policy. This may keep inflation sticky.
- Meanwhile, the US Dollar extends its winning spell as the American economy seems to be coping better than expected with the consequences of higher interest rates. The US Dollar Index (DXY) prints a fresh 10-month high at 106.32 amid global slowdown fears. 10-year US Treasury yields remain upbeat, above 4.5%, on hawkish interest rate outlook.
- The US Conference Board reported a decline in the Consumer Confidence Index to 103.0 in September from August’s reading of 108.7. The Conference Board commented that the decline in consumer confidence was visible among all age groups. Households seem worried about sticky consumer inflation, political uncertainty, and higher interest rates.
Technical Analysis: Gold price stabilizes below $1,900
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Gold price delivers a breakdown of the Symmetrical Triangle chart pattern formed on a daily time frame. A downside break of the neutral triangle could lead to higher volatility that results in wider ticks and heavy selling volume. The precious metal seems to be stabilizing below the 200-day Exponential Moving Average (EMA) around $1,908.00. Momentum oscillators indicate a fresh trigger of a bearish impulse.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.