- Gold dips sharply to $2,296 in response to US data showing an increase in employment costs, indicating persistent inflationary pressure.
- A stronger US Dollar and higher Treasury yields contribute to XAU/USD decline as market anticipates cautious Fed approach to rate adjustments.
- Upcoming economic events, including ISM Manufacturing PMI and Fed’s policy decision are highly anticipated by traders for further market direction.
Gold prices drop below the $2,300 threshold on Tuesday as data from the United States (US) show that employment costs are rising, thus putting upward pressure on inflation. Consequently, the US Federal Reserve (Fed) would need to be patient when lowering rates as stated two weeks ago by Fed Chair Jerome Powell.
XAU/USD trades at $2,296, down by more than 1.50% on Tuesday, amid rising US Treasury bond yields and a stronger US Dollar. Data from the US Bureau of Labor Statistics (BLS) witnessed a jump in the Employment Cost Index (ECI) in April. Besides that, American consumer sentiment deteriorated further, as revealed by the Conference Board in its April report.
Ahead of the week, the US economic docket will remain busy. Still, traders will focus mainly on the ISM Manufacturing PMI, the Fed’s monetary policy decision, and the US Nonfarm Payrolls report.
Daily digest market movers: Gold price creeps lower on high US Treasury yields, strong USD
- Gold’s drop is courtesy of the jump in US Treasury bond yields, a soft US Dollar. The US 10-year Treasury bond yield has risen five basis points (bps) to 4.665%, a headwind for the golden metal. At the same time, the Greenback, as measured by the US Dollar Index (DXY), has reclaimed the 106.00 milestone, up 0.52% to trade at 106.48.
- US Employment Cost Index (ECI), a measure of wages and benefits, increased by 1.2% QoQ after rising 0.9% at the end of 2023, exceeding forecasts of 1%, according to the Bureau of Labor Statistics (BLS). That would keep the Fed on its holding pattern as fears of inflation reaccelerating loom.
- US Conference Board (CB) Consumer Confidence dropped in April from 103.1 to 97, its lowest level since mid-2022, as Americans’ view of the job market and the outlook for the economy deteriorated.
- US economy continues to print mixed readings. Last week, the Gross Domestic Product (GDP) missed the mark. Still, inflationary data linked to the first quarter of 2024 sounded the alarm that the price trend is shifting to the upside, which might deter the Federal Reserve from easing policy sooner than expected.
- On May 3, the US Bureau of Labor Statistics (BLS) is expected to reveal April’s Nonfarm Payrolls figures, which are expected to come at 243K, below March’s 303K. The Unemployment Rate is estimated to stay at 3.8%, while Average Hourly Earnings would likely remain unchanged at 0.3% MoM.
- Data from the Chicago Board of Trade (CBOT) suggests that traders expect the fed funds rate to finish 2024 at 5.035%, down from 5.050% last Friday.
Technical analysis: Gold price slides beneath $2,300, eyes on $2,223
Gold price uptrend remains intact, though diving below the $2,300 mark could open the door for a deeper correction. If sellers keep XAU/USD prices below the April 23 daily low of $2,291, that will clear the path to challenge the next cycle high turned support at $2,223. Once those levels are cleared, up next would be $2,200.
On the way up, if XAU/USD reclaims $2,300, that would open the door to challenge the April 26 high of $2,352, so they can remain hopeful of challenging higher prices. The next resistance would be the $2,400 mark, followed by the April 19 high at $2,417 and the all-time high of $2,431.
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.
The Fed’s Impact on Gold Prices
The Federal Reserve’s cautious approach to rate adjustments and its focus on addressing increasing inflationary pressures have a direct impact on gold prices. As the Fed balances its dual mandate of price stability and full employment, any indications of the Fed raising interest rates to combat inflation can lead to a stronger US Dollar, which tends to weaken gold prices. On the other hand, if the Fed maintains a dovish stance, it could support higher gold prices as investors turn to the precious metal as a hedge against inflation.
- Gold dips sharply to $2,296 in response to US data showing an increase in employment costs, indicating persistent inflationary pressure.
- A stronger US Dollar and higher Treasury yields contribute to XAU/USD decline as market anticipates cautious Fed approach to rate adjustments.
- Upcoming economic events, including ISM Manufacturing PMI and Fed’s policy decision are highly anticipated by traders for further market direction.
Gold prices drop below the $2,300 threshold on Tuesday as data from the United States (US) show that employment costs are rising, thus putting upward pressure on inflation. Consequently, the US Federal Reserve (Fed) would need to be patient when lowering rates as stated two weeks ago by Fed Chair Jerome Powell.
XAU/USD trades at $2,296, down by more than 1.50% on Tuesday, amid rising US Treasury bond yields and a stronger US Dollar. Data from the US Bureau of Labor Statistics (BLS) witnessed a jump in the Employment Cost Index (ECI) in April. Besides that, American consumer sentiment deteriorated further, as revealed by the Conference Board in its April report.
Ahead of the week, the US economic docket will remain busy. Still, traders will focus mainly on the ISM Manufacturing PMI, the Fed’s monetary policy decision, and the US Nonfarm Payrolls report.
Daily digest market movers: Gold price creeps lower on high US Treasury yields, strong USD
- Gold’s drop is courtesy of the jump in US Treasury bond yields, a soft US Dollar. The US 10-year Treasury bond yield has risen five basis points (bps) to 4.665%, a headwind for the golden metal. At the same time, the Greenback, as measured by the US Dollar Index (DXY), has reclaimed the 106.00 milestone, up 0.52% to trade at 106.48.
- US Employment Cost Index (ECI), a measure of wages and benefits, increased by 1.2% QoQ after rising 0.9% at the end of 2023, exceeding forecasts of 1%, according to the Bureau of Labor Statistics (BLS). That would keep the Fed on its holding pattern as fears of inflation reaccelerating loom.
- US Conference Board (CB) Consumer Confidence dropped in April from 103.1 to 97, its lowest level since mid-2022, as Americans’ view of the job market and the outlook for the economy deteriorated.
- US economy continues to print mixed readings. Last week, the Gross Domestic Product (GDP) missed the mark. Still, inflationary data linked to the first quarter of 2024 sounded the alarm that the price trend is shifting to the upside, which might deter the Federal Reserve from easing policy sooner than expected.
- On May 3, the US Bureau of Labor Statistics (BLS) is expected to reveal April’s Nonfarm Payrolls figures, which are expected to come at 243K, below March’s 303K. The Unemployment Rate is estimated to stay at 3.8%, while Average Hourly Earnings would likely remain unchanged at 0.3% MoM.
- Data from the Chicago Board of Trade (CBOT) suggests that traders expect the fed funds rate to finish 2024 at 5.035%, down from 5.050% last Friday.
Technical analysis: Gold price slides beneath $2,300, eyes on $2,223
Gold price uptrend remains intact, though diving below the $2,300 mark could open the door for a deeper correction. If sellers keep XAU/USD prices below the April 23 daily low of $2,291, that will clear the path to challenge the next cycle high turned support at $2,223. Once those levels are cleared, up next would be $2,200.
On the way up, if XAU/USD reclaims $2,300, that would open the door to challenge the April 26 high of $2,352, so they can remain hopeful of challenging higher prices. The next resistance would be the $2,400 mark, followed by the April 19 high at $2,417 and the all-time high of $2,431.
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.
The Fed’s Impact on Gold Prices
The Federal Reserve’s cautious approach to rate adjustments and its focus on addressing increasing inflationary pressures have a direct impact on gold prices. As the Fed balances its dual mandate of price stability and full employment, any indications of the Fed raising interest rates to combat inflation can lead to a stronger US Dollar, which tends to weaken gold prices. On the other hand, if the Fed maintains a dovish stance, it could support higher gold prices as investors turn to the precious metal as a hedge against inflation.
