- Gold price remains under pressure as Fed policymakers see one more interest rate hike this year.
- A resilient US economy could slow down progress in the inflation battle.
- After an upbeat US Manufacturing PMI, investors shifted focus to the labor market data.
Gold price (XAU/USD) continues its decline, pressured by multiple headwinds. Federal Reserve (Fed) policymakers support one more interest rate increase in the remainder of 2023 as a resilient United States economy could slow down the progress against inflation. Apart from that, a strong improvement in the US Manufacturing PMI despite higher interest rates has strengthened the economic outlook.
The US economy has been performing strongly, based on parameters such as labor market conditions and consumer spending. Meanwhile, the manufacturing sector has been underperforming. A meaningful recovery in factory activity would strengthen the US economy further and make inflation more stubborn ahead, which would warrant more interest rate hikes from the Fed.
Daily Digest Market Movers: Gold price faces pressure amid multiple headwinds
- Gold price drops to near $1,820.00 after closing in red for six trading sessions in a row.
- The precious metal is expected to deliver more downside as Federal Reserve policymakers favored more interest rate hikes as the US manufacturing sector appears to be reviving.
- The message from Cleveland Fed Bank President Loretta Mester was ‘loud and clear’ that the Fed is not done with hiking interest rates. Mester said that one more interest rate hike is well-needed this year and that rates are required to remain high for a longer period. Interest rates should remain high for long enough until the central bank assesses the impact of policy-tightening already in place, she said.
- In addition to Mester, Fed Governor Michelle Bowman projected one more interest rate hike by 25 basis points (bps) to 5.50%-5.75% by the year-end if inflation progress slows.
- Meanwhile, Fed Governor Michael Barr expressed caution about how long interest rates should be held higher to bring down core inflation to 2%. Barr said that the US economy is resilient and price stability could be achieved without dampening job growth.
- The US economy is resilient on the grounds of labor market conditions and consumer spending. After the stronger-than-expected PMI data, a recovery in the factory sector is expected to strengthen the US economy further.
- On Monday, the Institute for Supply Management (ISM) reported an improvement in US factory activity. The Manufacturing PMI jumped to 49.0, much higher than estimates and the former release of 47.7 and 47.6, respectively.
- Despite the strong improvement, the Manufacturing PMI remained below the 50.0 threshold for the 11th time in a row, suggesting that the sector remains in contraction. The New Orders Index also outperformed expectations, jumping to 49.2 from the August reading of 46.8.
- A strong order book and upbeat labor market conditions indicate that the Manufacturing PMI could achieve the 50.0 benchmark in the upcoming months.
- The optimism for the Manufacturing PMI achieving the 50.0 yardstick is also backed by commentary from Fed chair Jerome Powell after engaging with small business owners in York, Pennsylvania, on Monday.
- After listening to concerns about higher inflation interest rates, and persistent labor shortages, Fed Powell assured that inflation would come down to 2% and emphasized the importance of strong labor market conditions.
- Meanwhile, investors await the Employment Change data for September by Automatic Data Processing (ADP), which is scheduled for Wednesday. As per the estimates, the US economy created 160K jobs against the 177K increase recorded in August.
- Before that, investors await the JOLTS Job Openings data for August, which will be published at 14:00 GMT. According to estimates, employers posted 8.83 million job vacancies in August, broadly unchanged from July’s reading of 8.827M.
- The US Dollar Index (DXY) refreshes a 10-month high at 107.20, supported by a hawkish stance from Fed policymakers, upbeat Manufacturing PMI data, and a cautious market mood.
Technical Analysis: Gold price sees support near $1,800
Gold price finds buying interest near $1,820.00 after an intense sell-off while the broader bias remains bearish due to multiple headwinds. The precious metal trades near a fresh six-month low and is expected to find support near the crucial support at $1,800.00. A bear cross, represented by the 20-day and 200-day Exponential Moving Averages (EMAs), warrants more downside. Momentum oscillators indicate strength in the 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.
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