- 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) witnesses selling interest as the US labor market is strengthening further. Unit Labor Costs in the April-June quarter remained higher at 2.2% vs. expectations and the former release of 1.6%. Meanwhile, individuals claiming jobless benefits for the first time dropped to 216K for the week ending September 01 vs. the former figure of 229K. Investors forecasted higher jobless claims at 234K. The precious metal 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 faces sell-off as Q2 Unit Labor Costs remain higher
- Gold price sets to deliver more losses as the US Dollar remains resilient due to upbeat wage growth and easing weekly jobless claims.
- Unit Labor Costs in the April-June quarter remained higher at 2.2% vs. expectations and the former release of 1.6%. Strong wage growth would keep consumer spending momentum upbeat and might keep inflation stubborn.
- Meanwhile, the US Department of Labor reported that individuals claiming jobless benefits for the first time dropped to 216K for the week ending September 01 vs. the former figure of 229K. Investors forecasted higher jobless claims at 234K.
- 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 declines toward $1,910
Gold price faces selling pressure while attempting to climb above the resistance 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.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
