- Gold trades at $2,318, up 0.13%, supported by lower-than-expected US inflation and falling Treasury yields. as Fed holds rates steady.
- Fed maintains rates and revises projections, signaling just one rate cut in 2024; Chairman Powell emphasizes need for sustained inflation control.
- US 10-year Treasury yield drops eight basis points to 4.324%, while DXY falls 0.51% to 104.71, enhancing gold’s appeal.
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’s hawkish hold and Fed Chairman Jerome Powell’s failure to provide a timetable for rate cuts boosted the Greenback. The XAU/USD trades at $2,318, gains 0.13%.
On Wednesday, Fed Chair Jerome Powell stated that they are less confident about inflation than previously “in order to cut.” He added, “If jobs are to weaken unexpectedly, the Fed is ready to respond.” When asked about the day’s US inflation report, Powell mentioned that it is just one report and emphasized the need to see the deflation process evolving toward the Fed’s goal.
Meanwhile, the Federal Open Market Committee (FOMC) monetary policy statement revealed the Fed 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 eight basis points to 4.324%, a tailwind for the yellow metal. Consequently, the DXY edged lower 0.51% to 104.71.
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 $2,160.
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.
