By Jigar Trivedi
Gold firmed up above $1,750 an ounce on Friday as the latest Federal Reserve meeting minutes showed that a substantial majority of US policymakers backed a slower pace of interest rate hikes in the coming months. The central bank now wants to assess the impact of its historic tightening campaign on the economy after raising the policy rate in six consecutive meetings and bringing borrowing costs to the highest levels since 2008. Markets are betting that the Fed would moderate the size of rate hikes to 50 basis points in December after delivering its fourth straight 75 basis point increase earlier this month. Gold is highly sensitive to the rates outlook as higher interest rates raise the opportunity cost of holding non-yielding bullion, denting its appeal.
Fed considers slower rate increases to be appropriate
A majority of Fed officials judged that a slowing in the pace of the fed funds rate increase would likely soon be appropriate, as it would better allow the Committee to assess progress toward its goals of maximum employment and price stability, minutes from the November 1-2 FOMC meeting showed. Policymakers also noted that with inflation showing little sign of abating, and with supply and demand imbalances in the economy persisting, the ultimate level of the federal funds rate that would be necessary to achieve the Committee’s goals was somewhat higher than they had previously expected. The Federal Reserve raised the target range for the federal funds rate by 75bps to 3.75%-4% during its November 2022 meeting, marking a sixth consecutive rate hike and the fourth straight three-quarter point increase, pushing borrowing costs to a new high since 2008.
The dollar index held below 106 on Friday and was on track to end the week lower, weighed down by expectations that the Federal Reserve would tighten less aggressively in the upcoming meetings. The latest Fed meeting minutes showed that a substantial majority of policymakers agreed it would likely soon be appropriate to slow the pace of interest rate hikes. Earlier this month, the Fed delivered its fourth straight 75 basis point rate increase in an effort to tame stubbornly high inflation, pushing borrowing costs to the highest levels since 2008. The central bank now wants to assess the impact of its historic tightening campaign on the economy, with recent softness in US economic data supporting the case for more moderate moves. The dollar is set for a weekly loss against other major currencies, but remains up week-to-date against the Chinese yuan amid a worsening Covid outbreak in China.
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Europe Central Bank tightening monetary policy
European Central Bank policymakers agreed that the central bank should continue normalizing and tightening monetary policy to combat high inflation, even in the event of a shallow recession, the accounts of the central bank’s October policy meeting showed. Officials noted that the inflation outlook continued to worsen, with inflation far too high and repeatedly above the projected figures, and that there was an increasing risk that it might become entrenched and that second-round effects and a wage-price spiral could emerge. Still, the central bank suggested that it might want to pause the ongoing interest rate hikes if there was a prolonged and deep recession, which would be likely to curb inflation to a larger extent. In October, the ECB raised its key interest rate by 75 bps, bringing borrowing costs to the highest since early 2009, and there was broad support for a meeting-by-meeting, data-dependent approach to taking future monetary policy decisions.
Going forward, $1730 an ounce is a good support and $1,790 an ounce seems to be a resistance. From an economic data point of view US will release consumer confidence on Tuesday, Q3 GDP on Wednesday, Core PCE Price index and manufacturing PMI on Thursday and lastly, Nonfarm payrolls on Friday hence the week will be crucial from data point of view. We may see MCX February gold to rally to Rs. 53,700 per 10 gram in the week.
(Jigar Trivedi, Senior Research Analyst – Currencies & Commodities, Reliance Securities. Views are author’s own.)