- Gold retreats to $2,026.93, facing pressure from a strengthening US Dollar and Treasury yield uptick.
- Market reevaluates Fed rate cut timeline with June odds at 50% for a potential easing.
- The US 10-year Treasury yield hovering around YTD highs keeps Gold’s price capped.
Gold price retraces after hitting the 50-day Simple Moving Average (SMA) at $2,033.67 during the European session and is down 0.40% as the Greenback (USD) dives. However, a rise in the US 10-year Treasury yield and traders trimming their odds of a dovish US Federal Reserve (Fed) sponsored a leg down in the non-yielding metal. The XAU/USD trades at $2,026.93 after hitting a high of $2,037.07.
Sentiment remains mixed, though tilted slightly negative, favoring the US Dollar. Interest rate speculators have priced out a Fed rate cut in March and May. For June, the odds of a quarter of a percentage point rate cut are at 50%. The US 10-year Treasury note climbs four-and-a-half basis points to 4.295%, shy of reaching the year-to-date (YTD) high of 4.354%, though keeping the yellow metal pressured, as investors align themselves with Fed officials’ posture of three rate cuts toward the end of 2024.
Daily digest market movers: Gold advance capped by the rise of US yields
- Data-wise, US New Home Sales rose by 1.5% from 0.651M to 0.661M, less than the 0.68M expected.
- The Dallas Fed Manufacturing Index for February contracted -11.3 though it improved compared to January’s -27.4 shrinkage, suggesting that business activity is recovering.
- The January minutes from the Federal Open Market Committee (FOMC) reveal that policymakers are cautious about reducing interest rates, mainly due to a recent uptick in inflation measures. While recognizing that the risks associated with meeting their dual mandates of price stability and maximum employment are becoming more balanced, the Fed intends to stay “highly attentive” to inflation. This focus comes even as they acknowledge that economic risks are skewed toward a downturn.
- Besides that, the US labor market remains strong after the latest Initial Jobless Claims data saw fewer Americans applying for unemployment benefits.
- US business activity moderated in February, revealed S&P Global. The Services and Composite Indices expanded below the previous month’s reading, though Manufacturing surprisingly jumped, exiting contractionary territory.
- Investors are pricing in 85 basis points of easing throughout 2024.
- The US Dollar Index, tracking the performance of the US Dollar against a basket of six major currencies, is currently trading near 103.84, down 0.12%.
- New York Fed President John Williams said the Fed is on track to cut interest rates “later this year.” He noted that the progress of inflation toward the central bank’s 2% target would be “bumpy,” but overall the economy is headed “in the right direction.”
Technical analysis: Gold fails to cling above 50-day SMA as sellers move in
Monday sees a repeat of Friday’s note: “Gold has shifted to a neutral-upwards bias as it hurdles the 50-day Simple Moving Average (SMA).”
Even though XAU/USD has failed to cling above the 50-day SMA, the bias is intact unless Gold falls below the February 16 swing low of $2,016.15, which would exacerbate a challenge of the October 27 daily high-turned-support at $2,009.42. Once cleared, that will expose key technical support levels, like the 100-day SMA at $2,007.82, followed by the 200-day SMA at $1,966.79.
On the flip side, buyers dragging the XAU/USD spot price above the 50-day SMA could pave the way to challenge the $2,050 figure. Once those levels are cleared, up next would be the February 1 high at $2,065.60, ahead of the December 28 high at $2,088.48.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
