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Federal Reserve‘s Role in US Monetary Policy and the Dollar
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The Federal Reserve (Fed) is the entity responsible for shaping monetary policy in the United States. Its operational framework is guided by two primary objectives: maintaining price stability and promoting full employment. The Fed’s principal instrument for achieving these goals involves the strategic adjustment of interest rates. When inflation escalates beyond the Fed’s target of 2%,leading to rapid price increases,the Fed responds by raising interest rates. This action increases the cost of borrowing across the economy, which in turn tends to strengthen the US Dollar (USD). A higher interest rate environment makes the United States a more appealing destination for international investors seeking returns on their capital. Conversely, if inflation falls below the 2% threshold or if the unemployment rate is elevated, the Fed may opt to lower interest rates. This policy aims to stimulate borrowing and economic activity, which typically exerts downward pressure on the US Dollar.
The Federal Reserve convenes eight scheduled policy meetings annually. During these sessions, the Federal Open Market Committee (FOMC) convenes to evaluate prevailing economic conditions and to formulate monetary policy decisions. The FOMC comprises twelve Federal Reserve officials. This group includes the seven members of the Board of Governors,the president of the Federal Reserve Bank of New York,and four presidents from the remaining eleven regional reserve Banks. These four regional presidents serve one-year terms on a rotational basis.
In exceptional circumstances, the Federal Reserve may implement a policy known as Quantitative Easing (QE). QE is a process designed to significantly increase the availability of credit within a struggling financial system. This non-standard policy measure is typically employed during periods of financial crisis or when inflation rates are exceptionally low. The Fed utilized QE as a primary tool during the Great Financial Crisis of 2008. The mechanism involves the Fed creating new US Dollars and using these funds to purchase high-quality bonds from financial institutions. Generally, QE tends to weaken the US Dollar.
Quantitative Tightening (QT) represents the inverse of Quantitative Easing
What are tariffs?
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Tariffs are essentially customs duties applied to imported merchandise or specific product categories.Their primary purpose is to bolster the competitiveness of local producers and manufacturers by offering them a pricing advantage over comparable imported goods. Tariffs are a common instrument of protectionist trade policies, frequently enough employed alongside other trade barriers and import quotas.
How do tariffs differ from taxes?
While both tariffs and taxes serve to generate government revenue for public services, they have distinct characteristics. Tariffs are paid upfront at the point of entry, whereas taxes are typically paid at the time of purchase. Furthermore, taxes are levied on individual taxpayers and businesses, while tariffs are the duty of importers.
What are the economic perspectives on tariffs?
Economists hold differing views on the utility of tariffs.Some advocate for their necessity in safeguarding domestic industries and rectifying trade imbalances. Conversely, others consider tariffs detrimental, perhaps leading to increased prices in the long run and escalating into damaging trade wars through retaliatory tariff impositions.
What are the proposed tariff strategies for the US?
In the lead-up to the November 2024 presidential election, Donald Trump indicated his intention to utilize tariffs to bolster the U.S. economy and its producers.In 2024, Mexico, China, and Canada collectively represented 42% of total U.S. imports, with Mexico being the largest exporter at $466.6 billion, according to the U.S. Census Bureau. Trump’s tariff strategy is expected to focus on these three nations. He also plans to allocate revenue generated from tariffs towards reducing personal income taxes.
Gold Price Slides Amid Dollar’s Rise, Geopolitical Tensions Loom
Rate Cut Expectations and Fiscal Worries Could Limit USD Gains
Gold prices experienced a dip, reaching a one-week low of $3,300, influenced by a stronger U.S. dollar. Anticipation of Federal Reserve rate cuts and concerns over U.S. fiscal policy may curtail the dollar’s gains, even as geopolitical risks offer safe-haven support for gold.
Factors Influencing Gold Prices
The modest uptick in the U.S. Dollar’s demand has diverted investment away from gold. Yet, growing expectations of the Federal Reserve lowering interest rates later this year may prevent aggressive bets by USD bulls, indirectly supporting the precious metal.
Furthermore, anxieties regarding the potential impact of **President Donald Trump’s** tax cuts and spending bill on the nationโs debt could restrain gains for the USD. Market sentiment remains sensitive, particularly concerning **President Trump’s** trade policies and recent Israeli strikes in Yemen, which curb risk appetite and provide a floor for gold prices.
Market Analysis: Key Drivers
- The dollar’s slight gains at the start of the week are pressuring gold prices, though this downside is somewhat mitigated by other supportive factors.
- **President Trump’s** โOne Big Beautiful Billโ is projected to increase the national debt by $3.4 trillion over the next decade, exacerbating long-term fiscal challenges.
- Concerns persist regarding economic repercussions from **Trump’s** tariffs and dovish stances from the Federal Reserve, potentially limiting significant USD appreciation.
Adding to global economic uncertainty, starting July 7th, the U.S. will be delivering tariff letters and/or deals to various countries, according to **Trump’s** social media posts. Also, any country seen aligning with anti-American BRICS policies will face an additional 10% tariff, with no exceptions.
- Currently, investors are pricing in over a 70% likelihood that the U.S. central bank will reduce borrowing costs in September, with expectations of at least two 25 basis point rate cuts by the end of the year.
- The Israeli military launched strikes on Houthi targets in Yemeni ports and a power plant after repeated attacks on Israel, sustaining geopolitical risks and bolstering gold as a safe haven.
Analysts await the release of the FOMC minutes on Wednesday for further market direction. According to a recent Reuters poll, economists are divided on the timing of the Fed’s first rate cut, with some predicting it as early as July, while others foresee a later move.
Technical Outlook
Repeated failures to sustain momentum above the 100-period Simple Moving Average (SMA) on the 4-hour chart, coupled with a drop below $3,300, may signal further losses for gold. Should negative traction continue, the price might descend towards the $3,270 support zone, potentially reaching the $3,248-3,248 region.
Conversely, the $3,324-3,325 area presents immediate resistance, followed by the $3,342-3,343 zone. A breakthrough beyond the $3,352-3,355 area could propel gold prices higher, aiming to reclaim the $3,400 level.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America. It accounts for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
Gold Prices Rebound Amid Geopolitical Tensions
Dollar Weakness and Safe-Haven Demand Fuel Gains
Gold experienced a modest recovery today, reversing earlier declines as the U.S. dollar softened and global uncertainties increased. The precious metal briefly dipped below $3,300 before regaining ground, supported by its traditional role as a safe-haven asset.
Geopolitical Risks Boost Safe-Haven Appeal
Escalating geopolitical tensions, particularly the ongoing conflict in Ukraine, are driving investors towards gold. Recent Russian strikes on the Kharkiv region have heightened concerns about regional stability. These concerns, coupled with persistent trade-related uncertainties, are bolstering demand for the safe-haven metal.
US Economic Data Dampens Rate Cut Expectations
However, Fridayโs stronger-than-expected U.S. jobs report tempered expectations for near-term interest rate cuts by the Federal Reserve. The U.S. Bureau of Labor Statistics reported 139,000 new jobs added in May, exceeding market forecasts of 130,000. This data suggests the U.S. economy remains resilient, reducing the urgency for the Fed to ease monetary policy.
โThe data prompted market participants to trim bets that the Federal Reserve will cut interest rates this year.โ
โFXStreet analysis
Despite the robust jobs data, concerns about the U.S. governmentโs financial health continue to weigh on the dollar. According to the Congressional Budget Office, the national debt is projected to reach 128% of GDP by 2034, adding to investor anxieties.
Trade Talks and Technical Analysis
Traders are also closely watching upcoming trade negotiations between the U.S. and China, scheduled to take place in London. Donald Trump previously indicated a โvery positiveโ phone call with Chinese leader Xi Jinping, raising hopes for a potential de-escalation of trade tensions.
From a technical perspective, analysts suggest that a sustained break below the $3,300 level is needed to confirm further downside potential. Support levels are identified around $3,283-3,282 and $3,246-3,245, with a longer-term target of $3,200. Conversely, resistance is seen near $3,352-3,353 and $3,377-3,378, with potential for a rally towards $3,400 if these levels are breached.
The gold market remains sensitive to both macroeconomic developments and geopolitical events, making it a closely watched asset in the current environment.
Gold Price Analysis: Navigating USD Fluctuations and Geopolitical Tensions
BUCHAREST – May 17, 2024 – In todayS analysis, the price of gold is being affected by a complex interplay of the U.S. dollar’s modest rebound and geopolitical tensions. The article provides an overview of the main drivers, including the Federal Reserve’s decisions, trade uncertainties, and the Russia-Ukraine conflict, which are all substantially impacting market movement. Read on to learn more about the outlook!
Gold Price Analysis: Navigating USD Fluctuations and Geopolitical Tensions
Gold prices are currently exhibiting a complex interplay of factors, attracting intraday sellers amid a modest rebound of the U.S. dollar from multi-week lows. However, the downside potential appears limited due to expectations of Federal Reserve rate cuts, concerns over U.S. fiscal policy, and persistent geopolitical uncertainties.
Key Catalysts Influencing Gold Prices
- U.S. Dollar Rebound: A slight resurgence in the U.S. dollar is exerting downward pressure on gold, as the two often move inversely.
- Federal Reserve Policy: Anticipation of future interest rate cuts by the Federal Reserve is providing underlying support for gold.
- Geopolitical Risks: Ongoing tensions, including those between the U.S. and China, and the Russia-Ukraine conflict, are bolstering gold’s safe-haven appeal.
Did you know? Gold has historically been considered a safe-haven asset during times of economic and political uncertainty. Its value tends to increase when investors seek refuge from riskier investments.
The USD and Fed Rate Cut Expectations
Investors are largely anticipating that the Federal Reserve will implement further interest rate cuts, especially given recent signs of easing inflation in the U.S.This expectation is capping the U.S. dollar’s strength and, consequently, supporting gold prices, which do not offer a yield.
Adding to the complexity, concerns about the U.S. fiscal situation, coupled with ongoing geopolitical risks and escalating U.S.-China trade tensions, are further limiting potential losses for gold.
Geopolitical Tensions and Trade Uncertainties
Rising geopolitical tensions and trade-related uncertainties are meaningful factors supporting gold prices. U.S. President donald Trump lashed out at China over the weekend and accused the latter of violating a preliminary tariff agreement, reviving fears of a trade war between the world’s two largest economies.
This statement underscores the fragility of trade relations and their potential impact on market sentiment.
Pro Tip: Monitor geopolitical events and trade negotiations closely. Unexpected escalations can lead to rapid increases in gold prices as investors seek safe-haven assets.
Moreover,the Trump administration is reportedly urging countries to present their most favorable trade proposals by Wednesday in an effort to speed up discussions before reciprocal tariffs come into effect on July 8.
These developments highlight the urgency and potential for further trade-related volatility.
The Russia-Ukraine Conflict
The ongoing conflict between Russia and Ukraine continues to fuel uncertainty. A second round of direct peace talks between Ukrainian and Russian delegations in Istanbul on Monday ended without a major breakthrough.
This lack of progress, combined with continued military actions, sustains a risk-averse environment that benefits gold.
Ukrainian President Volodymyr Zelenskyy’s statement that the surprise drone attacks over the weekend were a success and that it will continue if Russia doesn’t halt its offensive
further illustrates the heightened tensions and potential for escalation.
Federal Reserve’s Stance on Interest Rates
Market participants are closely watching the federal Reserve for signals regarding future monetary policy. The expectation of at least two 25 basis points interest rate cuts by the Federal Reserve in 2025 is a key factor limiting losses for gold.
Recent comments from Fed officials provide some clarity on the outlook for interest rate cuts. Fed Governor Christopher Waller stated that rate cuts remain possible later this year even with the Trump administration’s tariffs likely to push up price pressures temporarily.
Chicago Fed President Austan Goolsbee noted that interest rates can come down over 12-18 months.
However, Dallas Fed President Lorie Logan struck a more cautious tone, saying that the policy is well positioned to wait and be patient, and the risk is if higher short-term inflation expectations become entrenched.
Reader Question: How do rising U.S. debt levels impact gold prices? Share your thoughts in the comments below!
upcoming Economic Data and Market Focus
Traders are now focusing on the release of the U.S.JOLTS Job Openings data, which, along with speeches by influential FOMC members, will likely influence the U.S. dollar and gold prices. However, the primary focus remains on the U.S. monthly employment details, particularly the Nonfarm Payrolls (NFP) report due Friday.
Technical Analysis: Key Levels to Watch
From a technical standpoint,the breakout through the $3,324-$3,326 hurdle and subsequent strength beyond $3,355 was a key trigger for gold bulls. Oscillators on daily and hourly charts are holding in positive territory, suggesting that the path of least resistance for gold is to the upside.
- Support Levels: Any subsequent slide below $3,355 could be seen as a buying possibility, with support expected near $3,326-$3,324. Further selling could lead to testing the $3,286-$3,285 horizontal support.
- resistance Levels: Bulls might target a move beyond the $3,400 level, positioning for a move toward the next resistance near $3,430-$3,432. A sustained strength beyond this level could allow gold to retest its all-time peak and perhaps reach the $3,500 mark.