- Gold price extends higher as Israel prepares to attack Hamas group.
- Fed Chairman Powell has maintained neutral interest rates amid higher US bond yields.
- 10-year US Treasury yield jumps above 4.9% amid unsustainable budget deficits from Congress.
Gold price (XAU / USD) rose sharply as Middle East tensions continued to escalate and the Chairman of the Federal Reserve (Fed) Jerome Powell approved a stable interest rate policy in his speech on Thursday. The demand for organs intensified as Israeli forces prepared to enter the Gaza Strip with the aim of dismantling Hamas, the Palestinian military group. Meanwhile, despite the promise of humanitarian aid for civilians in Gaza by US President Joe Biden, Iran could step in and directly intervene in the conflict, which could turn into a feared Middle East regional war.
On Thursday, Fed Chairman Jerome Powell joined his teammates – Philip Jefferson, Austan Goolsbee, Michael Barr and Raphael Bostic – and delivered a neutral guidance on interest rates in his speech at the Economic Club of New York. Powell acknowledged that multi-year high US Treasury yields are significantly affecting overall spending and investment.
In an interview with CNBC, the president of the Atlantic Fed Bank, Raphael Bostic, said that the slowdown comes because of higher interest rates, but the economy will not see a recession. Bostic remains confident that the central bank will control inflation. He predicted that the Fed would cut interest rates at the end of 2024.
The President of the Philadelphia Fed Bank Patrick Harker, in an interview on Friday, favored holding interest rates because the economy is softening than thought.
Daily Digest Market Movers: Gold price soars as Middle East tensions support bullion demand
- The price of gold continues to rally having just broken the $1,980 resistance amid headwinds from the Federal Reserve and the Middle East.
- The Israeli-Palestinian conflict has already extended from the 14th day and the Israeli defense chief Yoav Gallant is preparing his troops to enter Gaza, aiming to dismantle the Hamas military.
- US President Joe Biden called for urgent humanitarian aid for civilians in Gaza. After visiting Israel, Biden said “loud and clear” that the United States stands with Israel.
- The demand for gold leaks remains optimistic due to constant risks of Iran’s intervention in the Middle East conflict, which would effectively turn it into a regional war.
- Meanwhile, rising expectations supporting an unchanged interest rate decision by the Fed on November 1 strengthened the appeal for Gold.
- Jerome Powell backed off a possible hold on interest rates while addressing the monetary policy outlook at the New York Economic Club, as expected. He acknowledged that rising U.S. Treasury yields have significantly tightened overall financial conditions.
- The 10-year US Treasury yield edged closer to 5% amid unsustainable US budget deficits, and rising interest rates.
- Jerome Powell acknowledged that the US economy is resilient. Labor demand was upbeat and consumer spending remained strong despite major efforts to ease inflation by raising interest rates.
- On the interest rate outlook, Powell said further policy tightening would depend largely on economic indicators, the developing outlook and geopolitical tensions.
- After Powell’s comment, trader bets for unchanged interest rates in the November meeting rose significantly, a bullish development for Gold. According to the CME Fedwatch tool, traders see a near 100% chance that the Fed will keep interest rates unchanged at 5.25-5.50%. The probability of one more interest rate hike in either of the two remaining monetary policy meetings in 2023 fell to 20%.
- Analysts at Wells Fargo said higher yields and a broader tightening of financial conditions “are doing the Fed’s job for it” by pushing up growth, thereby helping to cool inflation.
- Dallas Fed Bank President Lorie Logan said on Thursday that she was not confident about consumer inflation falling to 2% and emphasized the need for weakness in the labor market to achieve price stability.
- Lorie Logan cited that higher bond yields and recent economic data bought some time for the central bank to keep interest rates unchanged.
- Friday’s US economic outlook is light, with Fed’s Harker set to speak at 13:00 GMT and the Monthly Budget Statement expected to be released later in the US session.
Technical Analysis: Gold price climbs near $1,990
Gold price extends upward to near $1,990.00 amid multiple winds. The precious metal is on a three-day winning streak and is expected to recapture a five-month high of around $1,987.00. The ultimate resistance for the Gold price is seen at $2,000.00. The 20 and 50-day Exponential Moving Averages (EMAs) have climbed above the 200-day EMA, which indicates that the upside bias has strengthened. The Relative Strength Index (RSI) (14) is climbing above 60.00, guaranteeing more upside in the Gold price amid the absence of divergence and overbought signals.
Frequently Asked Questions about Fed
Monetary policy in the United States is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and to foster full employment. Its main tool to achieve these goals is by adjusting interest rates.
When prices rise too quickly and inflation exceeds 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 can 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 can resort to a policy called Quantitative Easing (QE). QE is the process by which the Fed greatly 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 chosen weapon of the Fed 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 of the bonds it holds maturing, in order to buy new bonds. It is usually positive for the value of the US dollar.