Monday, October 2, 2023

Gold prices are under pressure pending US inflation data


  • Gold prices remain in the woods as inflation turns cautious ahead of inflation data.
  • The Dollar’s attractiveness improved, as the US economy comfortably withstood rising interest rates.
  • An unexpected rise in US inflation could dampen market sentiment as debates over further interest rate hikes intensify.

The price of Gold (XAU/USD) remains under pressure as investors remain cautious ahead of US Consumer Price Index (CPI) data for August. The precious metal turned weaker as a sharp recovery in fuel prices indicated that headline inflation is likely to expand at a higher pace in August, dampening market sentiment and improving appeal for the US dollar. . .

The dollar recovered quickly on Tuesday as the US economy effectively absorbed the effects of the Federal Reserve’s (Fed) interest rate hike, unlike other economies that struggled to keep the labor market stable due to a tight monetary policy. Inflation data for August will be the most important, as it will be the last one ahead of the monetary policy decision in September.

Summary of Daily Market Drivers: Gold Corrects Amid Caution Ahead of Inflation Data

  • The price of Gold corrected and approached $ 1,920, as investors remained cautious before the August inflation data, which will be published on Wednesday at 12:30 GMT.
  • According to estimates, headline inflation grew by 0.5%. The core CPI, which excludes fluctuations in oil and food prices, grew at a stable 0.2%. The annual general CPI stood at 3.6%, compared to 3.2% previously. For its part, core inflation fell to 4.3%, compared to 4.7% in July.
  • Investors expect the headline CPI to expand at a higher pace, supported by a strong rebound in fuel prices due to a significant increase in global oil prices.
  • Market participants will be keeping a close eye on the August inflation data as it is the last reading of the CPI before the interest rate policy in September.
  • The unexpected increase in inflation in the US will increase the price of Gold as it will raise the prospect of a new interest rate hike by the Federal Reserve in the last quarter of 2023.
  • According to CME’s Fedwatch tool, traders see a 93% chance that interest rates will remain unchanged at 5.25%-5.50% in September. For the rest of the year, traders predict about a 54% chance that the Fed will keep monetary policy unchanged.
  • A high inflation number can also dampen the hope that the Fed will push the economy to the “golden path,” that is, a situation where inflation has fallen without causing an economy.
  • The Dollar Index (DXY) bounced back quickly after discovering intermediate support near 104.40 as fears of a global slowdown renewed. Market participants are projecting a slower growth rate in China due to poor demand prospects and low job growth.
  • According to a Reuters poll, China’s economy is expected to grow 5.0% this year, down from the 5.5% forecast recorded in the July survey. For 2024 and 2025, growth of 4.5% and 4.3%, respectively, is predicted.
  • The USD index recovered to near 104.80, supported by the strength of the US economy thanks to strong labor growth, decent consumer spending and an easing inflation outlook. While the economies of Europe and Asia are struggling to perform due to tight monetary policy, the US economy is effectively absorbing the burden of higher interest rates.
  • Over the weekend, US Treasury Secretary Janet Yellen said she was confident the central bank would contain inflation without harming the labor market. He does not consider the BRICS expansion led by China to be a major economic threat.
  • Although the US economy is strong despite rising interest rates, US stocks may come under pressure from rising mortgage costs. Bank of America (BofA) strategists expect the Fed’s expression of “higher for higher” interest rates to trigger a selloff in stocks over the next two months.
  • US 10-year Treasury yields recovered to around 4.28% amid cautious August inflation data.

Technical Analysis: Gold price fell to near $1,920

Gold price is correcting until it approaches the important support at $1,920. The precious metal has remained sideways since last week as investors remain uncertain about the outlook for interest rates. The yellow metal continues to face selling pressure near the 20- and 50-day exponential moving averages (EMA), while the 200 EMA continues to provide a cushion. Momentum oscillators show sideways price action, indicating that investors are waiting for a new economic trigger.

US Dollar FAQ

The United States Dollar (USD) is the official currency of the United States of America, and the “de facto” currency of a significant number of other countries where it is in circulation alongside local banknotes. According to 2022 data, it is the most traded currency in the world, with more than 88% of all global currency exchange operations, equivalent to an average of $6.6 trillion in daily transactions.
After the Second World War, the USD took over from the pound sterling as the world’s reserve currency. For most of its history, the US dollar was backed by gold, until the Bretton Woods Agreement in 1971, when the gold standard disappeared.

The most important thing that influences the value of the US dollar is the monetary policy, which is determined by the Federal Reserve (Fed). The Fed has two mandates: achieving price stability (inflation control) and promoting full employment. Your main tool to achieve these two goals is to adjust interest rates.
When prices rise quickly and inflation exceeds the 2% target set by the Fed, the Fed raises rates, favoring the dollar’s value. If Inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, weighing on the Dollar.

In extreme situations, the Federal Reserve can also print more dollars and do quantitative easing (QE). QE is the process by which the Fed increases the flow of credit into a clogged financial system.
This is an unconventional policy measure used when credit has dried up because banks are not lending to each other (for fear of counterparty default). This is a last resort when a simple lowering of interest rates cannot achieve the desired result. It was the Fed’s weapon of choice to fight the credit crunch that occurred during the Great Financial Crisis of 2008. It included the Fed printing more dollars and using it to buy US government bonds, mainly from financial institutions. QE usually leads to a weakening of the US dollar.

Quantitative tightening (QT) is the reverse process where the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal of maturing bonds in its portfolio with new purchases. It is generally positive for the US dollar.

Nation World News Desk
Nation World News Desk
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