- Gold prices rise over 1% after Fed Chairman Powell hints at impending interest rate cuts and expresses confidence that inflation is approaching the 2% mark.
- The US dollar index (DXY) falls 0.82% to 100.68 as Powell’s comments prompt traders to bet on a 50 basis point rate cut in September.
- The US 10-year Treasury yield falls five basis points to 3.80%, supporting the rise in gold prices as the market eyes the August nonfarm payrolls report for further guidance.
Gold prices are up over 1% on Friday, while greenback and Treasury yields are falling following dovish comments from Federal Reserve Chairman Jerome Powell. Powell signaled he was confident inflation was moving toward the 2% target and interest rates should be cut. The XAU/USD pair is trading at $2510, having bounced off its intraday low of $2484.
Gold prices rose sharply as Powell said, “It’s time to adjust policy.” He acknowledged that inflation was on track to reach 2% and said the Fed was focused on achieving its goal of maximum employment.
Following these comments, gold regained the $2,500 mark and the greenback extended its losses. The US dollar index (DXY), which measures the dollar’s performance against a basket of six currencies, fell 0.82% to close at 100.68.
US Treasury yields immediately fell, with the benchmark US 10-year note down five basis points to 3.80%, as traders increased their bets that the Fed would cut rates by 50 basis points at the September meeting.
The CME FedWatch tool shows that market participants had fully priced in a 25 basis point cut, while the probability of a larger cut is 36.5%, compared to 24% a day ago.
As the Fed now turns its attention to the labor market, the nonfarm payrolls report for August would be the final piece of the puzzle in determining the extent of the cuts.
Daily Market Drivers Summary: Gold Price Rises Ahead of US Inflation Report Next Week
- If US economic data continues to be weak, the upward trend in gold prices will continue, which would increase speculation about a massive interest rate cut.
- After Powell’s speech, other Fed officials made notable comments. Patrick Harker, President of the Philadelphia Fed, stated that the Fed needs to cut interest rates systematically. Austan Goolsbee, President of the Chicago Fed, added that monetary policy is currently at its most restrictive level and the Fed’s focus is now shifting to fulfilling its employment mandate.
- Next week’s U.S. economic agenda includes durable goods orders, the Conference Board (CB) consumer confidence index, initial jobless claims data for the week ending August 24, and the Fed’s favorite inflation indicator, the core personal consumption expenditures (PCE) index.
- In addition, Fed spokespeople, led by Christopher Waller and Atlanta Fed President Raphael Bostic, would meet to set the course for the September meeting.
Technical outlook: Gold’s uptrend intact, buyers target USD 2,550
The uptrend in gold remains intact and could continue if buyers push prices above the all-time high (ATH) of $2,531. A break of the latter would expose the $2,550 mark, followed by the $2,600 mark.
On the other hand, if gold closes the day below $2,500, a retest of the previous all-time high (ATH) of $2,483 is likely. If this is breached, the next support for gold would be the May 20 high of $2,450, followed by the 50-day SMA (Simple Moving Average) at $2,402.
Frequently Asked Questions about the Fed
Monetary policy in the U.S. is determined by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and to promote full employment. Its main tool for achieving these goals is adjusting interest rates. When prices rise too quickly and inflation is above the Fed’s 2% target, it raises interest rates, which increases the cost of borrowing across the economy. This leads to a stronger U.S. dollar (USD) because it makes the U.S. 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 can cut interest rates to encourage borrowing, which weighs on the greenback.
The Federal Reserve (Fed) holds eight meetings a year at which the Federal Open Market Committee (FOMC) assesses the economic situation and makes monetary policy decisions. The FOMC is attended by twelve Fed representatives – the seven members of the Board of Governors, the President of the Federal Reserve Bank of New York, and four of the remaining eleven presidents of the regional reserve banks, who serve a rotating one-year term.
In extreme situations, the Federal Reserve may resort to a policy called quantitative easing (QE). QE is the process by which the Fed significantly 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-quality bonds from financial institutions. QE usually weakens the U.S. 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 capital from the maturing bonds to buy new bonds. This usually has a positive effect on the value of the U.S. dollar.
