- Gold climbs, reacting to Fed Chair Powell’s hawkish comments and mixed US data.
- Tensions in the Middle East escalate, influencing Gold’s status as a safe-haven asset.
- Market expectations reduce the likelihood of multiple Fed rate cuts this year.
Gold prices edged higher late in Tuesday’s North American session, gaining 0.22% following a hawkish tilt by Federal Reserve Chair Jerome Powell. Economic data from the United States (US) was mixed, though Monday’s Retail Sales report and Powell’s remarks kept US Treasury yields higher, capping the yellow metal’s advance.
XAU/USD trades at $2,388 after hitting a daily low of $2,363. Risk appetite has deteriorated amid the heightened tensions in the Middle East. Following Iran’s attack on Israel over the weekend, the latter is set to retaliate even though the White House warned that it would not participate.
Given the backdrop, Gold is set to continue advancing, if not because Fed Chair Jerome Powell said that the US economy has performed quite strongly while acknowledging that recent data shows a lack of further progress on inflation.
Following those remarks, traders reduced expectations for the Federal Reserve to cut rates more than once this year, according to Reuters. The CME FedWatch Tools shows the first rate cut could happen in September, with odds for a quarter of a percentage point standing at 71.38%.
Daily digest market movers: Gold traders ignore higher US yields, strong production output data
- In March, US Building Permits saw a decrease of 4.3%, dropping to 1.458 million, which was below the expected 1.514 million and February’s figure of 1.523 million. Additionally, Housing Starts experienced a significant drop of 14.7%, falling from 1.549 million to 1.321 million, well under the forecast of 1.48 million.
- The Federal Reserve reported that March’s Industrial Production was stable, meeting both estimates and the previous month’s growth rate of 0.4% MoM.
- Despite mixed economic indicators, market participants remain focused on strong March US Retail Sales data released on Monday. Particularly noteworthy was the control group’s performance—essential for GDP calculations—which significantly exceeded both forecasts and the previous month’s results.
- Despite decent US economic data, market participants seem to be focused on geopolitical risks. Sources cited by The Jerusalem Post revealed that Israel has reportedly finalized plans for a counterstrike against Iran.
- Gold’s price remains high even though US Treasury yields are climbing more than 5 basis points (bps) in the belly and long end of the yield curve.
- US Dollar Index (DXY), which tracks the buck’s performance against a basket of six other currencies, gains 0.11% to 106.29, levels last seen in November 2023.
- Gross Domestic Product (GDP) estimates for Q1 2024 show that the US economy is expected to grow 2.9%, up from 2.8% estimated on April 15, according to the Atlanta GDPNow model.
Technical analysis: Gold buyers remain in charge despite RSI being in overbought levels
Gold is upwardly biased, and despite potential overextension, buyers continue to dominate. The Relative Strength Index (RSI) is showing signs of upward momentum again, with the possibility of challenging the $2,400 mark. A breach above this level could lead to a test of the all-time high at $2,431, followed by $2,450.
On the downside, a close below $2,343 may indicate a pullback towards $2,300, with further support at the April 5 swing low of $2,267.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US 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 may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially 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-grade bonds from financial institutions. QE usually weakens the US 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 principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
