- Gold price moves higher as Fed’s rate-cut bets persist.
- This week, the US NFP and ISM PMI reports will guide further action in the FX domain.
- The US Dollar advances further ahead of crucial economic data.
Gold price (XAU/USD) kicks-off the 2024 year on a promising note, demonstrating a firm-footing on Tuesday amid prospects of a reduction in interest rates by the Federal Reserve (Fed) starting in March. Factors that are boosting rate-cut hopes are significant progress in the underlying inflation declining towards 2% and easing labour market conditions due to restrictive monetary policy stance.
This week, investors should brace for sheer volatility as various economic indicators are lined-up for release. The ISM manufacturing PMI, JOLTS Job Openings data and Federal Open Market Committee (FOMC) minutes of December monetary policy meeting will be followed by Services PMI and the Nonfarm Payrolls (NFP) report. Market participants are unlikely to change bearish stance for the US Dollar and Treasury yields amid deepening rate-cut expectations by the Fed.
Daily Digest Market Movers: Gold price moves higher on Fed’s rate cut bets
- Gold price advances to near $2,075 amid prospects of early rate cuts by the Federal Reserve in 2024.
- As per the CME FedWatch tool, there is a 72% chance that the Fed will reduce interest rates by 25 basis points (bps) to 5.00-5.25%. The probability that the Fed will continue reducing rates in May is similar at 72%.
- The appeal for the Gold price has strengthened after Federal Reserve Chairman Jerome Powell changed his tone at the December monetary policy meeting from one that backs higher for longer interest rates to one that sees rate cuts being a topic for discussions going forward.
- However, Jerome Powell warned that the achievement of price stability is the Fed’s foremost objective.
- Investors should be prepared for volatile price action as the labour market, Manufacturing and Services PMI data are due this week. In addition to that, investors will focus on the FOMC minutes, which are set to be released on Wednesday.
- As per the estimates, the Institute of Supply Management (ISM) is expected to report Manufacturing PMI for October at 47.1, higher than the former reading of 46.7.
- A figure below the 50.0 threshold is considered a contraction in economic activity and this would be the 14th straight contraction in the US factory data.
- The US Bureau of Labor Statistics is scheduled to report JOLTS Job Openings data for November, which will also be released on Wednesday. Jobs posted by US employers were 8.850M, higher than the prior demand of 8.733M.
- A major focus for investors will be the FOMC minutes. The FOMC minutes will provide a detailed explanation behind keeping interest rates unchanged in the range of 5.25-5.50% for the third time in a row. Apart from that, investors will be focused on guidance for interest rates in 2024 and detailed projections for inflation and labour market conditions.
- Meanwhile, the US Dollar Index (DXY) has advanced to near 101.50 on Tuesday. In 2023, the USD Index ended its winning streak since 2020 on firmer rate-cut bets.
- This week, action in the USD Index will be guided by the labour market data, which is scheduled for Friday. But before that, market participants will focus on the US Automatic Data Processing (ADP) private payrolls data, which will be published on Thursday.
- As per the consensus, US private employers are expected to have hired 113K job-seekers in December, against hiring of 103K individuals in November.
Technical Analysis: Gold price jumps to near $2,075
Gold price climbs above Friday’s high, supported by expectations of early rate cuts by the Fed. The precious metal is expected to extend further towards the previous week’s high near $2,090. The broader appeal for the Gold price is extremely bullish as short-to-long term Exponential Moving Averages (EMAs) are sloping higher.
Meanwhile, momentum oscillators have shifted into the bullish trajectory, indicating more upside ahead.
Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.
Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.