Gold (XAU/USD) gathered bullish momentum at the beginning of the week on growing expectations of a Federal Reserve (Fed) interest rate cut in December. Although markets turned quiet in the second half of the week due to the Thanksgiving holiday in the US, the pair rose by more than 2% on a weekly basis. With the Fed’s blackout period coming into effect on Saturday, investors will scrutinize economic data releases from the United States.
Gold rises as Fed doves grow louder
Gold started the week on a bullish note as markets reassessed the odds of a 25-basis-points (bps) Fed rate cut at the last monetary policy meeting of the year. Late last week, Fed Governor Stephen Miran, who preferred a 50 bps rate cut in the previous two policy meetings, noted that he would vote for a 25 bps rate cut in December if his vote were to be the deciding factor on whether the Fed would lower the policy rate. Meanwhile, New York Fed President John Williams hinted that he could vote for a cut at the next meeting, saying, “I view monetary policy as being modestly restrictive. Therefore, I still see room for a further adjustment in the near term.”
After rising more than 1.5% on Monday, Gold edged slightly higher early Tuesday but closed the day virtually unchanged. The Automatic Data Processing (ADP) reported that private employers shed an average of 13,500 jobs a week for the four weeks ending November 8.
On Wednesday, the data from the US showed that there were 216,000 Initial Jobless Claims in the week ending November 22, a decrease of 6,000 from the previous week’s revised level. Additionally, the US Census Bureau announced that Durable Goods Orders rose by 0.5% in September, surpassing the market expectation for an increase of 0.3%. As these figures failed to influence market pricing of the Fed’s policy outlook, Gold held its ground and closed well above $4,100 heading into the US Thanksgiving Day holiday.
As trading conditions remained thin on Friday, Gold managed to stabilize near the upper limit of its weekly range heading into the weekend.
Gold investors to focus on US data
Fed officials will not be allowed to comment on the policy outlook until the December 9-10 meeting. Hence, investors will scrutinize data releases from the US to confirm or reassess the probability of a rate cut.
According to the CME FedWatch Tool, markets are currently pricing in about an 85% probability of a 25 bps cut in December.
The US economic calendar will feature the Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers’ Index (PMI) data on Monday. In case there is a noticeable improvement, with a reading above 50 in the Employment Index of the PMI survey, the USD could stay resilient against its rivals in the immediate reaction, making it difficult for XAU/USD to push higher.
The ISM Services PMI report will be published on Wednesday. If the headline PMI drops into contraction territory below 50, the USD could come under renewed selling pressure and allow XAU/USD to gain traction.
On Thursday, market participants will pay close attention to the November Challenger Job Cuts data. In October, planned layoffs surged to 153,074, marking the highest level in 22 years. A significant decline in this figure could ease fears over worsening conditions in the labor market and support the USD.
The US Bureau of Economic Analysis (BEA) will release the Personal Consumption Expenditures (PCE) Price Index figures on Friday. However, this data is unlikely to trigger a significant market reaction because it will be for September, as part of the clearing of the data backlog that built up during the government shutdown.
Gold technical analysis
The technical outlook points to a bullish stance in the near term but doesn’t yet highlight a strengthening momentum. On the daily chart, Gold holds comfortably above the 20-day Simple Moving Average (SMA) and the Fibonacci 23.6% retracement level of the August-October uptrend, located at $4,125. Additionally, the Relative Strength Index (RSI) moves sideways near 60.
On the downside, $4,125 aligns as the first support level before $4,085 (20-day SMA), $4,030 (50-day SMA) and $3,970 (Fibonacci 38.2% retracement). Looking north, resistance levels could be spotted at $4,245 (November 13 high), $4,300 (round level) and $4,380 (end-point of the uptrend).
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.
