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Gold (XAU/USD-spot) closed around 1876.64 Friday, slips almost -1.10% on Fed’s backdoor QE tapering, and as Fed may now begin to think about front door QE tapering (June policy meeting). Gold stumbled from inflation high around 1903.30 to a session low 1874.07 on the perception that U.S. inflation on the Real Street is indeed surging beyond lower base effects and some transitory factors. Further on early Monday European session, Gold made a low around 1856.75.
Fed is already sucking huge liquidity to the tune of $600B excess money market liquidity by reverse repo (backdoor QE tapering; equivalent almost 5-months of QE buying) and also withdrawing various COVID emergency liquidity/lending tools it created with the support of the U.S. Treasury/Congress. Thus Fed may now officially begin to think about QE tapering and may for the same by Dec’22, not Dec’21.
Fed will go for QE tapering when it sees substantial further progress (from Dec’20 levels) for its dual mandate of maximum inclusive employment and price stability (core PCE inflation at +2.0% on a sustainable basis- without transitory and base effects and on the course of moderately over +2.0% for some time). Overall, the U.S. Goldilocks NFP job report may help Fed for QE tapering only from Dec’22 rather than Dec’21. And Fed may target for average core PCE inflation around +3.4% in 2021 to compensate for previous misses.
All these pre-conditions for starting the normalization process of COVID monetary stimulus/super accommodative policies may ensure Fed to go for QE tapering from Dec’22 and gradual rate hikes from Dec’23. The U.S. economy should be fully reopened by Dec’21 (after full vaccinations including children/adolescents) and various transitory factors like labor shortage, supply chain disruptions, pent-up demand should be normalized by Q1-2022. The Fed will provide sufficient time to ensure sustainable economic/employment recovery and 2% price stability (core PCE inflation, without transitory factors).
But at the same time, as U.S. inflation is already spiking, the Fed may employ jawboning strategy (‘powerful forward guidance’) instead of any real action to keep everything in control (balance); too weak USD, especially against Chinese Yuan will cause more imported inflation. Thus Fed may now officially say they are thinking about thinking of QE tapering; already various Fed officials are actively discussing the pros and cons of QE tapering and preparing the market for the eventuality.
Some market participants also think that Fed may not only officially indicate QE tapering thinking, but may also provide a firm indication for the same in Aug’21 Jackson Hole Symposium speech (by Powell), which is a historical place to telegraph the market for such important policy change. In that scenario, Fed may also officially indicate its QE tapering and gradual rate hikes plan in its Sep’21 policy meeting (dot-plots) and may go for actual QE tapering and gradual rate hikes from Dec’21 and Dec’22 respectively. Thus, USD is getting a boost and every decline causing short covering or fresh buying.
But going by Fed’s pre-conditions for this normalization process and the fact that this time Fed will act only on real data, not any forecasts, Dec’21/Dec’22 may be too early for such QE tapering/gradual rate hikes. The U.S. inflation bound to spike under unprecedented monetary and fiscal stimulus (excess supplies of liquidity), but Fed has already changed its goalposts for its dual mandate. Fed will go for inclusive maximum employment and average inflation targeting instead of simple headline unemployment number below 4% and core PCE inflation at +2.0%. But in trying to do so, there is also a real risk of stagflation (lower/stagnant economic growth, higher inflation and higher unemployment). The Fed is now trying for reflation in line with Biden’s policy (investment/infra-led economic growth-like China).
Talking about U.S. unemployment, on Thursday DOL data shows that the number of Americans filing new claims for unemployment benefits (UI) dropped to 376K in the week ending 5th June, the lowest level in nearly 15 months and lower than market expectations of 370K, as the labor market continues to be supported by broader economic re-opening amid a steady decline in the number of daily COVID cases and the rapid pace of vaccinations. In addition, many states (mostly Republicans) recently decided to withdraw from federal unemployment benefit programs (PUA) as large and small businesses have been complaining about the difficulty to hire, saying the generous PUA benefits pay more than most minimum wage jobs (around $7.50/hour).
The continuing jobless claims in the US, which measure unemployed people who have been receiving unemployment benefits for a while, fell to 3499K in the week ending 29th May, from a revised 3757K a week before and below market expectations of 3602K.
Further, the number of Americans applying for financial assistance from the Pandemic Unemployment Assistance (PUA) scheme, which covers uninsured workers that do not qualify for initial claims (UI), fell to 71.292K in the week ending 5the June, from the previous week's revised level of 73.249K.
In may the number of unemployed people declined by 496K to 9316K while employment rose by 444K to 151620K in May, but still well below 1587735K employed persons in Feb’20, just before the COVID; i.e. the U.S. economy still needs to employ around 7115K (7.12M) or roughly 7M (7000K) more workers to reach maximum or pre-COVID employment levels. At around 540K present 4M moving average and expected accelerated rate after Sep-Dec’21 (PUA expiry and children/adolescents COVID vaccinations), it may take around April-June’22 for the U.S. economy to make substantial progress on maximum employment as-well-as price stability (core PCE inflation). Fed will consider maximum inclusive employment for its policy decisions, not mere headline unemployment number. Thus in that scenario, Fed may go for QE tapering from Dec’22 with an indication from Aug’22 Jackson Hole speech and official FOMC indication in the Sep’22 policy meeting.
Technical View: Gold –XAUUSD
Technically, whatever may be the narrative, Gold now has to sustain above 1895-1905-1930 levels for any further rally to 1955-1985-2010-2065 zones; otherwise, it will correct again in the coming days.
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