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Gold prices drop nearly 1% on Fed’s hawkish stance, strong US Dollar

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  • Gold retreats on its way toward $2,300 after hitting a daily high of $2,326.
  • Fed's revised projections show just one rate cut in 2024, a headwind for XAU/USD prices.
  • Lower producer prices and higher unemployment claims boost USD, 10-year Treasury yield drops to 4.242%.

Gold prices retreated during the North American session on Thursday after hitting a daily high of $2,326. The Federal Reserve (Fed) projects just one interest rate cut instead of the three proposed since December’s 2023 Summary of Economic Projections (SEP), aka the dot plot. In the meantime, mixed US economic data boosted the Greenback to the detriment of the golden metal.

The XAU/USD spot trades at $2,303, down almost 1%. US data from the Bureau of Labor Statistics (BLS) showed lower prices paid by producers, while the number of Americans applying for unemployment benefits exceeded estimates and the previous reading.

Although the figures suggest that the Fed could set the stage to lower interest rates, Fed officials estimate just 25 basis points (bps) of easing toward the end of 2024, according to the dot plot.

Despite that, according to data from the Chicago Board of Trade, market participants are eyeing 39 basis points of easing via December’s 2024 fed funds rate contract.

The US 10-year Treasury note yield dropped seven bps from 4.310% to 4.242%, usually a tailwind for the non-yielding metal that is feeling China’s Gold buying pause.

News that the People’s Bank of China paused its 18-month bullion buying spree weighed on the precious metal. PBOC holdings held steady at 72.80 million troy ounces of Gold in May.

On Wednesday, Fed Chair Jerome Powell stated that they are less confident about inflation than previously “in order to cut.” He added, “If jobs are to weaken unexpectedly, the Fed is ready to respond.” When asked about the US CPI report, Powell mentioned that it is just one and emphasized the need to see the deflation process evolving toward the Fed’s goal.

Daily digest market movers: Gold price tumbles after softer US data

  • US Dollar Index (DXY) increased by 0.49% to 105.20, a headwind for Gold prices.
  • US Producer Price Index (PPI) in May dipped from 0.5% to -0.2%, below estimates of 0.1% expansion.
  • Core PPI in May was unchanged at 0%, below forecasts of a 0.3% expansion and beneath April’s 0.5%.
  • Initial Jobless Claims for the week ending June 6 rose by 242K, above the consensus of 225K and the previous week's reading of 229K.
  • Despite US CPI report showing disinflation process continuing, Fed Chair Jerome Powell commented that they remain “less confident” about the progress on inflation.
  • Even though the latest US CPI and PPI reports were weaker than expected, the latest NFIB Small Business Optimism Index survey for May showed that businesses are struggling with higher prices and access to cheap financing.

Technical analysis: Gold price sellers regain control as prices are headed toward $2,300

The Gold price remains neutral to downwardly biased as the Head-and-Shoulders chart pattern remains in place, hinting that the non-yielding metal price is set for further losses. Momentum as measured by the Relative Strength Index (RSI) shows that sellers are in charge, an indication that once XAU/USD’s price drops below $2,300, lower prices lie ahead.

Gold’s first support would be $2,300. Once cleared the next stop would be the May 3 low of $2,277, followed by the March 21 high of $2,222. Further losses lie beneath, as sellers would eye the Head-and-Shoulders chart pattern objective at around $2,170 to $2,160.

On the flipside, if XAU/USD soars past the June 7 cycle high of $2.387, that paves the way to test the $2,400 figure.

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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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