Gold trades near two-week high ahead of Jackson Hole
- Gold price recovers sharply, supported by Greenback’s correction as the US economy appears to lose resilience.
- US firms start to operate at lower capacity in line with a deteriorating demand environment.
- Jerome Powell at Jackson Hole might outline the benefits of higher interest rates for a longer period.
Gold price (XAU/USD) recovered confidently as the US Dollar and Treasury yields faced selling pressure after S&P Global reported weak preliminary PMI data for August. Lower factory activity and bleak service sector growth raise concerns over the resilience of the US economy and strengthen hopes of a neutral commentary from Federal Reserve (Fed) Chair Jerome Powell at the Jackson Hole Symposium.
Investors remain worried about the financials of US firms as rising interest rates and higher inflationary pressures force them to scale down their operating capacity in accordance with a deteriorating demand environment. If this situation persists, labor market conditions are likely to deteriorate.
Daily Digest Market Movers: Gold price recovers ahead of Fed Powell’s speech
- Gold price continues its winning streak on Thursday as the US Dollar remains subdued and Treasury yields edged down ahead of the Jackson Hole Symposium.
- The precious metal strengthens as preliminary US PMI data for August released by S&P Global on Wednesday indicated that the economy is losing its resilience.
- The preliminary Manufacturing PMI came in at 47.0, underperforming expectations of 49.3 and July’s reading of 49.0. The Services PMI decreased to 51.0 against estimates of 52.2 and the former release of 52.3.
- Weak PMI figures signal the hit of tight monetary policy by the Fed on the economy.
- Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said: “A near-stalling of business activity in August raises doubts over the strength of US economic growth in the third quarter. The survey shows that the service sector-led acceleration of growth in the second quarter has faded, accompanied by a further fall in factory output.”
- The US central bank has raised interest rates aggressively to 5.25%-5.50% in a war against stubborn inflation. Inflation has come significantly lower to 3.2%, but investors are worried about how the Fed will reach the 2% desired rate as price pressures persist.
- Meanwhile, investors will focus on the commentary from Fed Chair Jerome Powell at the Jackson Hole Symposium.
- Jerome Powell is expected to underpin the need to keep interest rates higher for a longer period rather than opting for further tightening of the monetary policy.
- In July’s monetary policy meeting, Powell commented that more hikes were on the cards if economic data remained encouraging.
- Any comment about rate cuts by Powell at Jackson Hole will improve the risk-taking ability of market participants.
- Apart from the interest-rate guidance, the outlook on inflation and the US economy will be keenly watched.
- The US Dollar Index remains rangebound above 103.00 on Thursday after a sell-off move. On the economic data front, Durable Goods Orders for July will be published at 12:30 GMT. Orders are seen contracting by 4.0%, swinging from the 4.6% increase recorded in June.
- The 10-year US Treasury yields extended their correction to 4.19% after the PMI data suggested that the US economy is losing its resilience.
- Contrary to that, St. Louis Fed President James Bullard said the US economy faces risks of stronger growth. This could elevate the need for more interest-rate increases from the central bank to keep up the fight against inflation.
Technical Analysis: Gold price tests two-week high
Gold price extends its four-day winning streak, supported by a correction in the US Dollar and Treasury yields as the PMI data prompted investors to question the resilience of the US economy. The recovery move in the precious metal pushes it above the 200-day Exponential Moving Average (EMA), suggesting that the long-term trend is turning bullish again. The yellow metal also climbs above the 20-day EMA but a closing above the same is highly required to keep the upside momentum.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.