Gold edges higher after Fed speakers favor Christmas interest-rate cut
- Gold pushes higher on Tuesday after some Fed speakers indicated they might be leaning towards possibly cutting interest rates in December.
- Elevated geopolitical risk from conflicts in the Middle East and the political crisis in France further send investors to Gold.
- Technically, XAU/USD could be about to extend a wave c lower as it completes a three-wave pattern.
Gold (XAU/USD) edges higher to trade in the $2,630s on Tuesday after commentary from Federal Reserve (Fed) speakers led to an uptick in the probabilities of the Fed cutting interest rates at its December policy meeting. Lower interest rates are positive for Gold because they reduce the opportunity cost of holding the non-interest paying asset.
Elevated geopolitical risks could also be underpinning Gold amid continued conflict in the Middle East intensified now by the outbreak of civil war in Syria, the Russia-Ukraine conflict, and political risk in France. During times of crisis, investors turn to Gold for safety.
Gold edges higher on Christmas-Fed-cut hopes
Gold is drifting higher on Tuesday after comments from several Fed members appeared to lean in favor of the central bank cutting US interest rates at their December meeting.
Fed Governor Christopher Waller said on Monday that he was leaning “toward supporting a cut in December.”
His colleague, New York Fed President John Williams, though more cautious, said that further cuts to interest rates were needed as risks to inflation and employment were more balanced. Still, he added: “one could argue a case for skipping a rate cut in December, (I) will be watching data closely to decide.”
Yet he went on to say, “policy is restrictive enough that a December cut still allows ample scope to slow (the) pace of cuts later if needed.”
Atlanta Fed President Raphael Bostic, meanwhile, said on Monday that he was “keeping his options open” regarding a cut in December. However, he too appeared to lean in favor of such a move, adding that since the risks to the labor market and inflation were “roughly in balance, we likewise should begin shifting monetary policy toward a stance that neither stimulates nor restrains economic activity.”
Their comments, as well as better-than-expected US Purchasing Manager Index (PMI) data for November, increased market bets the Fed will cut interest rates by 25 basis points. On Tuesday, the CME FedWatch tool calculates the probability of such a scenario at 72.5% (from the mid 60s previously).
Technical Analysis: XAU/USD possibly about to unfold c-leg of three-wave pattern
Gold keeps crawling along a major trendline as it continues its overall range-bound development.
Within that sideways market, Gold looks like it might be forming a three-wave Measured Move pattern. If so, then there is a possibility the next leg will be down, in a wave c (dashed line on chart below), which is of similar length to wave a.
XAU/USD 4-hour Chart
A break below $2,605 (November 26 low) would confirm a follow-through lower towards the target for the end of wave c at around $2,550.
The (blue) Moving Average Convergence Divergence (MACD) has recently crossed below its red signal line, providing a sell signal. The MACD is also in negative territory, a bearish sign. Furthermore, its general shape could indicate further downside on the cards, supporting the bearish near-term outlook.
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.