Gold Price Rises as Fed Raises Rates, US Dollar Index Under Pressure

Introduction

In the wake of the Federal Reserve’s (Fed) decision to raise interest rates, the price of gold is witnessing a surge. Investors are closely watching the slight interest rate increase, considering the possibility that this could be the final rate hike before a pause in tightening. Additionally, the US Dollar Index is facing pressure as concerns over a global recession diminish and confidence in the US economy strengthens. In this news article, we explore the impact of the Fed’s decision on the gold price and the US Dollar Index, as well as the factors contributing to market volatility.

The Fed’s Interest Rate Hike and Gold Price Momentum

As the Fed announced a 25 basis points (bps) increase in interest rates, the gold price (XAU/USD) showed signs of emerging from the uncertainty. The market expects this rate hike to be the last for the current year, potentially leading the Fed to extend the pause in rate hikes. As a result, the precious metal gains strength, attracting investors seeking a safe-haven asset in times of economic uncertainty.

US Dollar Index Under Pressure

The US Dollar Index (DXY) is feeling the weight of concerns surrounding a global recession. However, a decrease in such worries, strong consumer confidence in the US, and expectations of an interest rate peak announcement from the Fed are contributing to the index’s decline. Investors are closely monitoring US GDP data for the second quarter, set to be released after the Fed’s policy decision, which could further impact the US Dollar Index’s trajectory.

Gold Price’s Resilience Despite Hawkish Fed Expectations

The price of gold has shown resilience despite expectations of a hawkish Fed. Prior to the Fed’s announcement, the gold price hovered around $1,960.00. The anticipated rate increase of 25 bps, raising rates to 5.25%-5.50%, has raised questions about the future direction of interest rate policy for September.

Following the policy change in July, another interest rate hike appears justified, with investors closely monitoring Jerome Powell’s recent remarks. According to the CME Group Fed watch tool, interest rates are projected to peak between 5.25% and 5.50%, remaining stable for the rest of the year. The Fed is not expected to discuss rate decreases as their primary focus is on gradually reducing inflation to 2%.

Factors Impacting US Inflation

The US economy faces contrasting signals regarding inflation. While the Consumer Price Index has slowed to 3.0%, and core inflation is below 4.8%, the labor market remains tight. Businesses are responding to labor shortages by hiring new employees and raising compensation, leading to concerns about the US inflation rebounding.

Furthermore, increased disposable income has resulted in steady consumer expenditure, sustaining core inflation at a persistently high level. Strong economic conditions have boosted US consumer confidence to a two-year high of 117.0 in July.

Global Growth Projections and Investor Sentiment

The International Monetary Fund (IMF) has raised its global growth projection for 2023 to 3.0%, alleviating fears of a global recession and exerting pressure on the US Dollar Index. The upward revision of the forecast has also affected safe-haven assets.

According to a survey by the National Association for Business Economics (NABE), 71% of respondents in the United States believe there is a 50% or lower risk of a recession. These positive sentiments could influence investor behavior after the Fed announces its interest rate decision.

Economic Indicators to Watch

Investor attention is expected to shift toward the second-quarter GDP data and the June Durable Goods Orders report, both scheduled for release on Thursday at 12:30 GMT. The US economy is anticipated to have grown at an annualized rate of 1.8% in the second quarter, compared to the 2.0% growth witnessed in Q1. Furthermore, orders for durable goods are expected to grow at a slower rate of 1.0% than the previous month.

Technical Analysis: Gold Price’s Breakout Attempt

As the Fed’s interest-rate strategy unfolds, the price of gold is attempting to break above the immediate resistance level of $1,970.00. Over the past three trading sessions, the precious metal has experienced steady fluctuations between $1,953 and $1,968, despite the uncertainty surrounding the Fed’s outlook for the rest of the year.

At $1,951.00, the 20-day and 50-day exponential moving averages (EMAs) have crossed in a bullish manner, indicating a strong bullish bias in the market.

Conclusion

As the Fed raises interest rates, the gold price gains momentum while the US Dollar Index faces pressure. Market participants are closely analyzing economic indicators and statements from the Fed chair to gauge the future direction of monetary policy. The global economic outlook and investor sentiment also play significant roles in shaping market dynamics. As uncertainty lingers, investors keep a close eye on gold’s price movement, attempting to discern potential breakout patterns and trading opportunities.

Frequently Asked Questions (FAQs)

1. Will the Fed raise interest rates again this year?

Yes, the market anticipates that the Fed’s interest rate hike in July will likely be the last for this year, leading to a pause in rate hikes.

2. What is the expected peak for interest rates according to the CME Group Fed Watch tool?

The CME Group Fed Watch tool projects interest rates to peak between 5.25% and 5.50%, remaining stable through the end of the year.

3. Why is the US Dollar Index facing pressure?

The US Dollar Index is under pressure due to reduced concerns about a global recession, strong consumer confidence, and expectations of an interest rate peak announcement from the Fed.

4. What are the factors impacting US inflation?

Despite a still-tight labor market, the Consumer Price Index has slowed to 3.0%, and core inflation has fallen below 4.8%. However, concerns about a recovery in US inflation persist due to businesses hiring new employees and increasing compensation to offset labor shortages.

5. What is the IMF’s global growth projection for 2023?

The IMF has raised its global growth projection for 2023 to 3.0%, up 20 basis points from its previous projection in April.