Gold price drops as investors underpin US Dollar amid risk-off market tone

06 Sep 2023, 17:39 · Views 40

Gold price extends a two-day losing spell as investors channel funds into the US Dollar.
US recession fears recede sharply due to cooling inflationary pressures and stable job growth.
Investors await the US ISM Services PMI data for August for fresh guidance.

Gold price (XAU/USD) continues its two-day losing streak on Wednesday as investors keep pumping money into the US Dollar due to deepening global recession fears. Investors underpinned the US Dollar as a safe haven as developing economies are facing the wrath of higher interest rates from Western central banks and potential upside risks of deflation to the Chinese economy.

Fundamentally, it doesn’t seem bad for the Gold price as the US Unemployment Rate rose sharply to 3.8% and wage growth slowed in August. Investors hope that the Federal Reserve (Fed) is done with hiking interest rates. Fed Governor Christopher Waller supported the view, citing the latest batch of economic data that has provided more room to the central bank to assess whether the cost of borrowing needs to be increased again.

Daily Digest Market Movers: Gold price weakens amid strength in the US Dollar

Gold price resumes its downside journey, tests territory below the crucial support of $1,925.00 as investors underpin the US Dollar as a safe-haven asset amid deepening global uncertainties.
The precious metal fails to find attention despite the Federal Reserve being expected to keep interest rates steady at 5.25-5.50% for the remaining year.
As per the CME Fedwatch Tool, there is a 53% chance that interest rates will remain unchanged at 5.25%-5.50% by year-end.
Fed Governor Christopher Waller said on Tuesday the latest batch of economic data has provided more room to the central bank to assess whether interest rates need to increase again. Fed Waller further added that he doesn’t see any trigger forcing further policy tightening.
A higher Unemployment Rate and a slower wage growth rate for August are supportive catalysts that would allow Fed policymakers to deliver an unchanged interest rate decision.
Contrary to Fed Waller, Cleveland Fed Bank President Loretta Mester said there is still a lot of time before the FOMC decision in late September and the central bank will get a lot of data and information by then.
The US Dollar hovers near a fresh five-month high, marginally lower than 105.00. The Greenback is walking on thin ice as investors hope that the Fed is done with hiking interest rates further.
US Factory Orders for July contracted sharply by 2.1% after expanding for four straight months, while investors forecasted 0.1% shrinkage. In June, the economic data expanded significantly by 2.3%.
New Orders for manufactured goods were contracted due to a sharp decline in demand for durable goods as corporations banked on backlogs amid a weak demand outlook.
On Wednesday, investors will keenly focus on the ISM Services PMI for August, which will be published at 14:00 GMT. Investors anticipate a nominal drop to 52.5 vs. 52.7 in July.
Investors will also focus on commentary from Fed policymakers: Boston Fed President Susan Collins and Dallas Fed President Lorie Logan.
Last week, the US ISM Manufacturing PMI for August remained stabilized but continued to stay below the 50.0 threshold, which signals contraction in economic activity.
US firms stated that they are focusing more on sustaining margins, operating with the available labor force and inventories due to easing confidence in household spending.
The US Dollar has been performing well as recession fears in the US economy recede due to the stable job market and cooling inflationary pressures. Analysts at Goldman Sachs see a 15% chance that the US economy will slide into a recession. Earlier, the expectations of a recession in the US economy reached at 20%.
Meanwhile, discussions about US-China trade relations have also underpinned the US Dollar. US Commerce Secretary Gina Raimondo said on Tuesday, “Don’t expect any changes to US tariffs on China imposed by Trump.”

Technical Analysis: Gold price extends losing spree

Gold price extends its two-day losing streak, skids below Tuesday’s low of $1,925.37 as the US Dollar remains resilient due to the risk-off mood. The precious metal slips below the 20 and 50-day Exponential Moving Averages (EMAs). Selling interest in the yellow metal after a recovery move to near $1,950.00 indicates that investors considered the pullback as a fresh selling opportunity. The 200-day EMA will continue to act as a strong cushion for Gold bulls.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

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.

How often does the Fed hold monetary policy meetings?

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.

What is Quantitative Easing (QE) and how does it impact USD?

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.

What is Quantitative Tightening (QT) and how does it impact 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.

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