On Monday (December 11th) during the Asian market session, the US dollar index continued its intraday rebound trend and is currently trading around 104.10; Spot gold has significantly declined, with gold prices falling below $1995 per ounce earlier and plummeting by about $10 on the day. Nick Timiraos, the Federal Reserve's mouthpiece, reported that Federal Reserve officials are unlikely to have a serious discussion about when to cut interest rates this week, and may not discuss it in the coming months. This news has hit market expectations for a Fed rate cut, putting selling pressure on gold prices. The price of gold has dropped twice since last Friday, hitting the 1995 front line.
FXStreet analyst Eren Sengezer wrote on Monday that bullish gold became hesitant before the US CPI and Federal Reserve announced policies this week. The short-term technical outlook shows that gold is losing its bullish momentum.
The US Department of Labor announced last Friday that non farm payroll added 199000 jobs in November, exceeding analyst forecasts of 180000, and the unemployment rate dropped to 3.7%. After the data was released, US short-term interest rate futures traders reduced their bets on the March rate cut and now believe that the Federal Reserve is more likely to cut rates in May. The probability of starting interest rate cuts in March was originally 60%, but it has been reduced to below 50% after non farm payroll measures are implemented.
The US dollar index closed last Friday up 0.3% at 104. Spot gold closed at 2004.41 ounces last Friday, a decrease of 1.19%.
"Federal Reserve Speaker": It is unlikely that the Fed's decision this week will discuss interest rate cuts!
At a critical moment when the Federal Reserve is about to make its latest interest rate decision this week, Nick Timiraos, the chief economist of The Wall Street Journal, known as the "Federal Reserve's mouthpiece," reported on Sunday local time that Federal Reserve officials are unlikely to have serious discussions about when to cut rates this week and may not discuss it in the coming months unless the economic weakness exceeds expectations.
Timiraos wrote that so far, everything has been smooth. After a series of "chilling" interest rate hikes, the rate of inflation decline this year has exceeded the expectations of many Federal Reserve officials, which they did not expect two years ago. The biggest question now is when the Federal Reserve can start cutting interest rates and how much it will be. The answers to these questions will have a significant impact on households, the market, and even the 2024 US presidential election.
Timiraos stated that a danger is that Powell and his colleagues - accused of reacting too slowly to soaring inflation two years ago - will now wait too long to lower interest rates to ensure that inflation completely subsides. This mistake may excessively suppress economic growth and lead to economic recession.
Timiraos warns that premature rate cuts by the Federal Reserve without curbing inflation would also be a major mistake. The Federal Reserve does not want to repeat the mistakes of 1967, when it boosted weak economic growth by lowering interest rates, only to see prices soar.
Federal Reserve officials are cautious about premature interest rate cuts because they are concerned that new shocks, such as rising oil prices, will trigger a new surge in inflation, as happened in the 1970s.
Timiraos wrote that Powell and his colleagues are expected to maintain interest rates unchanged at this week's meeting. The last time officials raised the benchmark federal funds rate to the 5.25% -5.5% range was in July, a 22 year high. Interest rates affect the overall borrowing costs of the economy, such as mortgage, credit card, and commercial loan rates.
Timiraos stated that Federal Reserve officials are unlikely to have serious discussions about when to cut interest rates this week, and may not discuss it in the coming months unless the economic weakness exceeds expectations. However, they believe that interest rates do not need to be maintained indefinitely at the current level of economic restrictions. Officials will release the latest interest rate forecast after Wednesday's meeting, which will show that most people expect a rate cut next year.
Michael Feroli, Chief Economist of JPMorgan Chase, believes that Federal Reserve Chairman Powell will not be involved in the discussion of interest rate cuts. He said, "At the press conference, we believe Powell will try to shift the topic away from the first easing period, and he will point out that the committee is currently only considering whether to keep the policy unchanged or tighten it."
Michael Pearce, Chief US Economist at Oxford Economics, also believes that Wednesday's press conference was slightly hawkish, indicating that Powell and the Federal Reserve tend to maintain higher interest rates for a longer period of time.
Stephen Gallagher, Chief Economist of Societe Generale in the United States, said that the Federal Reserve's policy statement will continue to lean towards an hawkish stance, once again discussing possible future tightening policies.
Gallagher stated that at the press conference, Powell will remind the market that if inflation accelerates again, the Federal Reserve may have to raise interest rates again. Powell will emphasize that it is too early to talk about interest rate cuts now.
Analysts point out that if Powell makes hawkish remarks this week, the US dollar is expected to experience a strong rebound and push gold prices further down.
Gold prices may have a strong reaction to US CPI and the Federal Reserve's dot chart
FXStreet analyst Eren Sengezer said that the November Consumer Price Index (CPI) data for the United States will be released on Tuesday. In October, the CPI remained unchanged month on month. If the data shows a negative value, it may put pressure on the US dollar in the initial reaction and provide a boost for gold. Investors will also closely monitor the core CPI data, which is expected to rise by 0.2% for the second consecutive month. A reading of 0.4% or higher may help the US dollar find demand.
On Wednesday, the Federal Reserve will announce its interest rate decision and release a revised forecast summary (SEP), also known as a "dot matrix". The September SEP showed that policymakers predicted an additional 25 basis points rate hike this year and a 50 basis point rate cut in 2024. In this situation, if the Federal Reserve chooses not to keep policy interest rates unchanged at 5.25% -5.5%, it will be a significant bullish surprise for gold. Market participants will carefully study the "dot matrix" in an attempt to identify the timing of policy changes.
According to the "Federal Reserve Watch" tool of the Chicago Mercantile Exchange Group (CME Group), the market currently expects a nearly 60% chance that the Federal Reserve will cut interest rates by 25 basis points as early as March. Sengezer stated that if the revised SEP shows a total interest rate cut of 100 basis points or more next year, US yields may decline and gold may gain a bullish outlook.
On the other hand, if interest rate expectations remain unchanged in 2024, it may have the opposite effect and trigger a rebound in the US dollar. Federal Reserve Chairman Jerome Powell's last press conference this year may also affect the trend of gold prices. Powell may suppress market expectations for a policy shift in early 2024. However, considering the Federal Reserve's reliance on data, such a tone should not be surprising.
Sengezer pointed out that on Thursday, the European Central Bank and the Bank of England will also announce monetary policy decisions. If the European Central Bank and the Bank of England adopt a more cautious attitude towards policy changes in 2024 than the Federal Reserve, investors may digest policy differences. In this situation, the euro/dollar and pound/dollar may rise, and widespread selling pressure around the dollar may support gold. On the contrary, dovish surprises from the European Central Bank and the Bank of England may boost the US dollar and put pressure on gold.
In terms of economic data, S&P Global will release the initial value of the US manufacturing purchasing managers' index for December on Friday.
Technical Outlook Analysis of Gold This Week
Sengezer stated that gold trading prices are currently slightly lower than the upward trend since early October. At the same time, the relative strength index (RSI) on the daily chart fell towards 50. Both of these technological advancements indicate that bullish momentum is being lost.
On the downward trend, if the daily closing price of gold is below $2000/ounce, it may attract technical sellers and open the door for gold to fall towards $1980/ounce (50% retracement of the October December rise) and $1960/ounce (50 day moving average).
Sengezer stated that gold needs to stabilize within the upward channel and turn 2020 USD/oz into support in order to be bullish again. In this case, the gold price may encounter resistance at $2060 per ounce (the midpoint of the upward channel) and then aim for $2080 per ounce (the upper limit of the upward channel).
