Gold price languishes near one-month low amid renewed rate jitters, bullish US Dollar

FX
  • Gold price attracts fresh sellers and is undermined by reduced Fed rate cut bets. 
  • political uncertainty in Europe and geopolitical risks should limit the downside.
  • Traders also seem hesitant ahead of the US CPI and FOMC decision on Wednesday.

Gold price (XAU/USD) meets with a fresh supply during the Asian session on Tuesday and erodes a part of the previous day’s modest recovery gains from the $2,287 area or over a one-month low touched in reaction to the upbeat US jobs data. Investors have been scaling back their bets for an imminent interest rate cut by the Federal Reserve (Fed) in September. This keeps the US Treasury bond yields elevated and assists the US Dollar (USD) to stand tall near a multi-week high touched on Monday, which, in turn, is seen undermining demand for the precious metal. 

Furthermore, the People’s Bank of China (PBoC) sharply reduced its buying activities in May, marking an end to its one-and-a-half-year-long buying spree and contributing to driving flows away from the Gold price. That said, political uncertainty in Europe and geopolitical risks should limit deeper losses. Traders might prefer to wait for this week’s release of the latest US consumer inflation figures and the FOMC decision on Wednesday for cues about the timing when the Fed will begin cutting rates. This will determine the near-term trajectory for the non-yielding yellow metal. 

Daily Digest Market Movers: Gold price is weighed down by diminishing odds for a September Fed rate cut move

  • The upbeat US Nonfarm Payrolls released on Friday fueled speculations that the Federal Reserve will keep rates higher for longer and turn out to be a key factor acting as a headwind for the non-yielding Gold price. 
  • The chances of a rate cut in September fell to around 50% following the US jobs data and the markets are now pricing in just one cut of 25 basis points this year, either at the November or December policy meeting.
  • The yield on the benchmark 10-year US government bond holds steady above 4.45%, while the yield on the rate-sensitive two-year US Treasury note remains close to 5.0%, which, in turn, is underpinning the US Dollar.
  • The USD Index, which tracks the Greenback against a basket of currencies, stands tall near its highest level since May 14 set on Monday and contributes to capping the upside for the USD-denominated commodity.
  • French President Emmanuel Macron’s decision to call snap elections later this month increased political uncertainty in the Eurozone’s second-biggest economy and could lend support to the XAU/USD. 
  • Traders also seem reluctant and keenly await this week’s key US macro data – the latest consumer inflation figures – and the crucial FOMC decision on Wednesday before placing aggressive directional bets.

Technical Analysis: Gold price could accelerate the fall once the $2,285  pivotal support is broken decisively

From a technical perspective, Friday’s breakdown below the 50-day Simple Moving Average (SMA) was seen as a fresh trigger for bearish traders against the backdrop of negative oscillators on the daily chart. Some follow-through selling below the $2,285 horizontal support will reaffirm the bearish outlook and drag the Gold price to the next relevant support near the $2,254-2,253 region. The downward trajectory could extend further towards the $2,225-2,220 area en route to the $2,200 round figure.

On the flip side, the $2,325 horizontal zone is likely to act as an immediate strong barrier ahead of the 50-day SMA support breakpoint, currently pegged near the $2,343-2,344 region. This is followed by the $2,360-2,362 supply zone, which if cleared should allow the Gold price to retest last week’s swing high, around the $2,387-2,388 area and reclaim the $2,400 mark. A sustained strength beyond the latter will negate any near-term negative bias and pave the way for a further appreciating move in the near term.

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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