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  • Gold price stabilizes near a six-day low as the appeal for the US Dollar strengthens.
  • The US economy remains resilient while other nations are going through the consequences of restrictive monetary policy.
  • Strong demand for the US service sector could allow the Fed to keep doors open for further policy tightening.

Gold price (XAU/USD) consolidates near a six-day low and remains exposed to more falls as investors keep funding the US Dollar due to an infirm global economy. The precious metal fails to capitalize on a widely anticipated unchanged interest rate decision by the Federal Reserve (Fed), which will be announced on September 20. Meanwhile, investors await Q2 US Unit Labor Costs data, which will be published at 12:30 GMT.

With economies like the UK and the Eurozone struggling due to tight monetary policy and high inflationary pressures and China facing deflation risks, the US economy remains resilient. The US economy is expected to avoid recession as inflation starts cooling due to the strict interest rate policy by the Fed, while job growth and consumer spending remain broadly stable.

Daily Digest Market Movers: Gold price edges lower as US economy remains resilient

  • Gold price hovers near a six-day low below $1,920.00 as the US Dollar remains resilient due to deepening fears of a slowdown in the global economy.
  • The precious metal faces selling pressure as the US gains traction on further data showing a resilient economy. The Institute for Supply Management (ISM) agency reported better-than-anticipated Services PMI data for August.
  • The ISM Services PMI landed at 54.5 against expectations of 52.5 and July’s reading of 52.7. As the sector accounts for two-thirds of the economy, the data points to continued strength in the US economic prospects and strong consumer spending.
  • Also, the New Orders Index of the Services PMI rose significantly to 57.5  against the 55.0 figure recorded in July, indicating that the demand outlook for the services sector is upbeat.
  • Strong demand for services recede fears of a recession in the US economy but  it could also contribute to raising consumer inflation expectations. This would allow the Federal Reserve to keep the door open for further policy tightening.
  • While the Fed’s Beige Book released on Wednesday reported that the economy grew at a modest pace in the last few weeks, inflationary pressures abated and labor growth remained subdued.
  • As per the CME Group’s FedWatch Tool, traders see a 93% chance for interest rates to remain unchanged at 5.25%-5.50% in the September policy meeting. Also, the chances that the central will keep the current monetary policy unchanged for the remainder of the year are stable at around 53%.
  • About the interest rate outlook, Boston Fed President Susan Collins said that further action will be based on incoming data. Collins expects a slowdown in the coming months and said that the central bank is far from containing inflation.
  • Analysts at Goldman Sachs see a 15% chance that the US economy will slide into a recession as inflation cools down and job growth remains solid. Earlier, expectations of a recession in the US economy were at 20%.
  • The US Dollar looks ready to surpass the immediate resistance level of 105.00, capitalizing on fading recession fears in the US economy while other nations are exposed to recession.
  • In the Eurozone, the S&P Global Composite PMI dropped to 46.7 in August, the lowest figure since November 2020. Also, the UK Composite PMI dropped to 48.6 in August, the lowest since January. Meanwhile, China continues to face deflation risks due to deteriorating demand.
  • Investors shift their focus towards the April-June quarter Unit Labor Costs data, which will be published at 12:30 GMT. Labor costs are expected to have increased by 1.6%, the same pace as in the first quarter. A higher-than-expected reading would demonstrate decent wage growth, which would elevate inflationary pressures.
  • Speeches from Fed policymakers are also due: Chicago Fed Bank President Austan Goolsbee, New York Fed Bank President John C. Williams and Atlanta Fed Bank President Raphael Bostic are set to speak.
  • On Wednesday, the US Senate confirmed Philip Jefferson as vice chair of the Fed, while Fed Governor Lisa Cook was also confirmed to a fresh 14-year term.
  • Market sentiment remains downbeat as China’s exports contracted significantly in August, signaling further vulnerability in the Chinese economy.

Technical Analysis: Gold price stabilizes below $1,920

Gold price consolidates below the crucial support of $1,920.00 amid resilience in the US Dollar due to downbeat market sentiment. The precious metal remains under pressure after failing to sustain above the 20-day and 50-day Exponential Moving Averages (EMAs). The yellow metal is declining toward the 200-day EMA, which trades around $1,910.00. Momentum oscillators indicate a lackluster performance ahead amid uncertainty about the interest rate outlook.

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.

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