- Gold prices reach a new record of $2,141.59, driven by mounting expectations of forthcoming Fed policy easing.
- Reports of slowing business activity in the US services sector contribute to the rally as XAU/USD now trades at $2,133.50.
- A decline in US Treasury yields supports the surge in Gold prices.
Gold prices rallied sharply on Tuesday with the XAU/USD spot reaching an all-time high of $2,141.59 via Reuters. Growing speculation that the US Federal Reserve (Fed) could begin to ease policy increased following two reports highlighting an economic slowdown in the services sector. The XAU/USD trades at $2,133.50, up more than 2.40%.
S&P Global revealed that business activity is slowing down. February’s data was softer than last month, although the S&P Global Composite Index exceeded forecasts. Meanwhile, the Institute for Supply Management (ISM) was weaker than expected, while the US Department of Commerce revealed that Factory Orders plunged.
After the data, XAU/USD edged higher from close to $2,120, pushing toward the all-time high before settling in. US Treasury yields along the short and long end of the curve plummeted as seen on the 10-year benchmark note rate at 4.135%, down eight basis points (bps).
- The S&P Global Services PMI experienced a slight decrease to 52.3, falling from January’s 52.5, while the Composite PMI, which includes both manufacturing and service sectors, registered at 53.8. This figure did not meet expectations and was lower than the previous reading of 54.2.
- Additionally, the ISM Services PMI reported a decline to 52.6 from 53.4, coming in below the anticipated consensus of 53. This resulted in a negative impact on the US Dollar.
- Factory Orders in January fell more than expected, from 0.2% to -3.6% MoM.
- Following the data, interest rate probabilities measured by the CME FedWatch Tool suggest traders are expecting the first cut in June, with odds increasing to 55% from 49.7% a week ago.
- Gold prices remain supported by strong central bank buying in emerging markets.
- The near-term demand for Gold will be influenced by Fed Chair Jerome Powell’s testimony before Congress on Wednesday and an array of United States economic data released later this week.
- Jerome Powell is expected to reiterate that there is no urgency for rate cuts due to resilient economic growth. The Fed isn’t likely to shift from its hawkish stance toward policy normalization until it gets convinced that inflation will sustainably return to the 2% target. The Fed wants to see inflation declining further before considering rate cuts.
- On Monday, Atlanta Fed Bank President Raphael Bostic said a strong labor market and decent economic growth have bought time for the Federal Open Market Committee (FOMC) to decide on when rate cuts will be optimal. Bostic added that the Fed is having a “rebounding success” as inflation slowly returns to the desired target without hurting labor demand.
- The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, fell 0.03% to 103.80.
Gold is skyrocketing, though it has retreated from ATH seen at $2,141.59, which could open the door for a pullback. In that event, XAU/USD’s first support would be the $2,100.00 mark, followed by the December 28 high at $2,088.48 and the February 1 high at $2,065.60.
On the flip side, XAU/USD’s next resistance would be $2,150.00, followed by the $2,200.00 mark.
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.