Powell heats up interest rate cuts, causing gold to slightly rise

2024-07-10 2461

On Wednesday (July 10th) in the Asian morning trading, spot gold fluctuated narrowly and is currently trading around $2365 per ounce. Gold prices rose slightly on Tuesday, closing at $2365.07 per ounce. Despite the strengthening of the US dollar and an increase in US bond yields, Federal Reserve Chairman Powell stated in his speech to Congress that the US "economy is no longer overheating" and is "warming up" interest rate cuts in September, providing support for gold prices. Investors are waiting for the release of US June inflation data later this week to further clarify the Federal Reserve's interest rate path.

Bart Melek, head of commodity strategy at Dao Ming Securities, said that the market expects an increase in the possibility of the Federal Reserve starting interest rate cuts as early as September, which has played a positive role in driving the current market situation.

The recently released US economic data shows a slowdown in the labor market, consolidating expectations that the Federal Reserve is about to start cutting interest rates.

Federal Reserve Chairman Powell testified in Congress on Tuesday that the inflation rate is still higher than the Federal Reserve's target of 2%, but has been improving in recent months, and more positive data will strengthen the rationale for the Fed's interest rate cut.

The focus of the market is now shifting towards the Consumer Price Index (CPI) data released on Thursday, with recent data showing that inflation has unexpectedly rebounded since the beginning of the year and has fallen back.

Han Tan, Chief Market Analyst at Exinity Group, said that if the market sees evidence of persistent US inflation, it may prompt precious metals to give back more recent gains.

According to the FedWatch tool of ChiNext, traders currently estimate a probability of approximately 75% for a rate cut in September. A decrease in interest rates will lower the opportunity cost of holding interest free gold.

On this trading day, Federal Reserve Chairman Powell will also deliver a semi annual monetary policy testimony to the House Financial Services Committee, and investors need to pay attention. Additionally, pay attention to news related to the geopolitical situation.

Spot Gold Daily Chart

Powell emphasized the risk balance between dual policy tasks as a prelude to interest rate cuts

In his speech to Congress, Federal Reserve Chairman Powell said that the US "economy is no longer overheated", the employment market has "significantly cooled" from the extreme state during the COVID-19 epidemic, and has returned to the situation before the epidemic in many aspects, which indicates that the reason for interest rate reduction is increasingly sufficient.

We are well aware that we are currently facing two risks, and we can no longer just focus on inflation, even though it is still "above" the 2% target. Powell testified in the Senate Finance Committee on Tuesday. "The labor market seems to have completely regained balance."

Powell told lawmakers that he did not want to send any signals about the timing of any future interest rate actions, and insisted on his recent approach of focusing more on the evolution of economic data and the possible response options that the Federal Reserve may make, rather than providing clear guidance on when and what can happen.

However, as the November 5th presidential election approaches and according to current arrangements, the Federal Reserve only had two meetings before that, Powell has been repeatedly questioned by lawmakers from both parties. Democrats hope he evaluates the risks to the job market if interest rates are not cut soon, while Republicans ask him to explain the pain that inflation still exceeds the 2% target is causing to families.

North Dakota Republican Senator Kevin Cramer told Powell, "Any action to lower interest rates before November 5th would give people a bad feeling."

Throughout the hearing, Powell emphasized the importance of the Federal Reserve independently setting interest rates and his own intention to make decisions based on data. Powell stated that the independence of the central bank has brought good results and should continue to be maintained.

Analysts say that his views in this regard seem to have at least opened the door to a rate cut as early as September. "His focus has shifted to a certain extent towards the risk balance between the dual tasks of the Federal Reserve," said Christopher Hodge, Chief Economist at Flushing Investment Management in the United States. "The Federal Reserve needs to act before the labor market weakens... This seems to be laying the foundation for a policy reversal in September."

Tuesday is the first day of Powell's semi annual monetary policy testimony in Congress. He will attend the hearing of the House Financial Services Committee on Wednesday at 22:00.

Powell's opening speech focused on a review of economic and monetary policy, while senators' questions mainly focused on housing costs and banking regulatory reform proposals being discussed within the Federal Reserve. Powell stated in a prepared speech that inflation has been improving in recent months, and "more good data will strengthen" the reasons for easing monetary policy

Powell's statement seems to indicate that the Federal Reserve is increasingly confident that inflation will return to its target level. Although there has been a lack of progress in inflation in the first three months of this year, recent improvements have helped the Fed establish confidence that price pressures will continue to weaken.

"At the beginning of this year, we lacked progress in achieving the 2% inflation target, while recent monthly readings showed slight further progress," Powell said. "More positive data will enhance our confidence that inflation is continuing to decline towards 2%."

The employment report released last Friday showed that the United States added 206000 new jobs in June, which remained stable, but the monthly growth rate slowed down, while the unemployment rate rose to 4.1%.

Powell stated that the unemployment rate is "still relatively low", but also pointed out that "given the progress made in reducing inflation and cooling the labor market in the past two years, rising inflation is not the only risk we face."

Powell stated that "keeping policies too tight for a long time may excessively weaken economic activity and employment," disrupting what he called the "still stable" period of economic growth. Currently, private demand is "strong," overall supply conditions are improving, and "housing investment is rebounding.".

After Powell's speech, investors still expect the possibility of the Federal Reserve cutting interest rates in September to be close to 70%. If interest rates are to be lowered in September, the Federal Reserve may adjust the wording of the policy statement to be issued after the July 30-31 meeting.

"He has started warming up for interest rate cuts," said Brian Jacobsen, Chief Economist at Annex Wealth Management. "They believe there is a risk of not lowering interest rates soon. In the past, they only focused on inflation."

Prior to Powell's testimony, the Federal Reserve stated in a report submitted to Congress last Friday that there is ample reason to believe that price pressures are decreasing, especially in the real estate market, which is a major area leading to sustained inflation in recent times. (End)

Yellen predicts that inflation will continue to decline, and White House economic advisors say significant progress has been made in fighting inflation

US Treasury Secretary Yellen said on Tuesday that rent and housing costs are still causing inflation in the United States to remain above ideal levels, but over time, consumer price pressures will continue to decline. White House National Economic Committee Director Brad said the government has made "significant progress" in reducing inflation.

Yellen told the Financial Services Committee of the United States House of Representatives that factors leading to rising inflation, including supply issues and tight labor markets, have eased, which will help continue to push consumer price pressures down.

Yellen said, "I believe that over time, it (inflation) will continue to fall. Rent and housing costs are causing it to remain above our ideal level."

She said, "Although the labor market was initially very tight, now we have a strong labor market, which reduces the pressure of inflation concerns, so inflation is decreasing."

Brainard stated that the Biden administration is encouraged by the sustained progress made in reducing inflation, but President Biden will continue to work towards reducing the cost of living for working families.

Brainard stated that several months of data confirm that inflation is returning to the Federal Reserve's target of 2%, and pointed out that the latest data shows an inflation level of 2.6%, which she said marks "significant progress".

The personal consumption expenditure (PCE) price index in the United States increased by 2.6% year-on-year in May, which is a favored inflation indicator by the Federal Reserve.

Brainard added that upon closer examination of the core inflation category, it was found that food prices have actually decreased, while gasoline prices remained stable at around $3.50 per gallon during the "driving holiday" on July 4th.

"But we also know that Americans are still under pressure from the cost of living," Brainard said. She said Biden will continue to push for more affordable housing, slow down rent increases, and introduce tax breaks to help first-time homebuyers.

The United States will release June Consumer Price Index (CPI) data on Thursday. The May CPI remained unchanged month on month, and analysts expect to see another weak reading this week.

Goldman Sachs Asset Management believes that the growth rate of the US economy will slow down in the second half of the year

Goldman Sachs Asset Management (GSAM) executives said on Tuesday that they expect the US economic growth rate to slow to around 2% in the second half of 2024.

"It's definitely a soft landing," said Lindsay Rosner, head of multi industry investment at Goldman Sachs' asset management division. "With the data coming out, that's what we're seeing."

Rosner added that investors are "indeed likely" to see a US interest rate cut in the second half of 2024. She does not expect the Federal Reserve to start cutting interest rates before September, but adds that the rate of rate cuts thereafter may remain at 25 basis points per quarter.

Rosner said that as interest rates decline, she expects the fixed income market to benefit from it. She said she saw particularly interesting opportunities in the high-yield bond market and structured credit.

Biden delivered a strong speech at the NATO summit, stating that Ukraine can stop Putin

US President Biden welcomed NATO member countries to the Washington Summit on Tuesday and vigorously defended his foreign policy achievements during his presidency. Domestic and foreign allies are closely monitoring this summit, hoping to find evidence that this troubled US president is still able to lead the country.

81 year old Biden has endured 12 days of embarrassment, with people questioning his suitability for public office. Some Democratic lawmakers and campaign donors are concerned that Biden will lose the November 5th election if he performs poorly in the debate on June 27th.

"Putin's wish is to completely conquer Ukraine... and erase Ukraine from the map," Biden said of Russian President Putin. "Ukraine can and will stop Putin."

The White House hopes that his speech can reverse external speculation. In his speech, he spoke with firm and confident tone, avoiding any slip of the tongue or confusion during the debate.

Biden rejected calls for him to withdraw from the campaign against 78 year old Republican Trump and vowed to defeat him in November. So far, he still has the support of the majority of elites within the party.

The core agenda of this NATO summit is to commit to providing new military and humanitarian assistance to Ukraine, as well as building bridges for this war-torn country to join NATO.

Ukrainian President Zelensky arrived in Washington on Tuesday, stating that he will "strive" for NATO to strengthen Ukraine's air defense capabilities and provide it with more F-16 fighter jets, and Washington seems ready to agree to this request.

He said in a social media video, "We are working to secure additional security for Ukraine, including weapons, funding, and political support."

US National Security Advisor Sullivan stated that NATO will announce the establishment of a new military command center in Germany, responsible for training and equipping the Ukrainian military, and appointing a senior representative in Kiev to deepen bilateral relations. US Secretary of State Antony Blinken said that the summit will "further strengthen" the path of Ukraine's accession to NATO.

The Middle East War Continues

On July 9th local time, the Iraqi militia armed "Islamic Resistance Organization" issued a statement stating that the organization launched drone attacks on "important targets" in the Umrashrash area of the southern Israeli city of Eilat and the largest port in Israel, Haifa Port. There has been no response from Israel regarding this matter.

According to the Israeli Defense Forces and emergency organizations, the occupied Golan Heights were attacked by approximately 40 rockets launched from Lebanon on the 9th, resulting in the deaths of two Israelis. Hezbollah in Lebanon claimed to have launched this attack.

According to Agence France Presse, on the 9th local time, the United Nations protested against Israel's latest large-scale evacuation order from the Gaza Strip. The previous day, Israel extended the evacuation warning to most areas of the Gaza Strip, while the Israeli military continued to carry out airstrikes on the Gaza Strip.

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