.jpg)
- Gold price enters a bullish consolidation phase near an all-time peak touched on Monday.
- Reduced Fed rate cut bets cap gains for the non-yielding metal amid overbought conditions.
- Elevated US bond yields underpin the USD and also act as a headwind for the XAU/USD.
Gold price (XAU/USD) trades with a positive bias for the third successive day on Tuesday and is placed just below the all-time peak, around the $2,345-2,346 region during the early European session. Talks over a ceasefire between Israel and Hamas remained deadlocked. Moreover, Iran has threatened military action against Israel over an alleged strike on its embassy in Syria, raising the risk of a further escalation of geopolitical tensions in the Middle East. This, in turn, is seen as a key factor that continues to act as a tailwind for the safe-haven precious metal.
That said, extremely overbought conditions on the daily chart hold back traders from placing fresh bullish bets around the Gold price amid expectations that the Federal Reserve (Fed) could delay cutting interest rates. Meanwhile, hawkish Fed expectations remain supportive of elevated US Treasury bond yields and lend some support to the US Dollar (USD), which, in turn, is seen capping gains for the non-yielding yellow metal. Traders also seem reluctant to place aggressive bets ahead of the release of the US consumer inflation and FOMC minutes on Wednesday.
Daily Digest Market Movers: Gold price remains supported by geopolitical risks, despite reduced Fed rate cut bets
- The upbeat US jobs data released on Friday, along with the recent hawkish remarks by Federal Reserve officials, force investors to trim their bets for the total number of rate cuts in 2024 and cap gains for the Gold price.
- Chicago Fed President Austan Goolsbee acknowledged on Monday that the US economy remains strong, but the central bank must determine how long to be restrictive on monetary policy without damaging the economy.
- Minneapolis President Neel Kashkari said that the inflation rate is running around 3%, and the Fed has to get back down to 2%. The labor market is not red hot like it was 12 months ago, but it’s still tight.
- The markets are now pricing in a nearly 50% chance that the Fed will leave the policy rate unchanged in June, lifting the yield on the benchmark 10-year US government bond to its highest level since late November.
- Elevated US Treasury bond yields act as a tailwind for the US Dollar and further contribute to keeping a lid on the non-yielding yellow metal, though geopolitical tension might continue to lend some support.
- Israel’s Prime Minister Benjamin Netanyahu said that a date has been set for a ground offensive in the southern Gaza city of Rafah, tempering hopes for a potential ceasefire and keeping a lid on the latest optimism.
- Investors now look to the US Consumer Price Index (CPI) and the FOMC meeting minutes on Wednesday for clues about the Fed’s rate-cut path, which should provide a fresh directional impetus to the XAU/USD.
Technical Analysis: Gold price bulls not ready to give up yet, overbought RSI on the daily chart warrants caution
From a technical perspective, the Relative Strength Index (RSI) on the daily chart is flashing extremely overbought conditions and warrants some caution for bullish traders. Hence, it will be prudent to wait for some near-term consolidation or a modest pullback before positioning for an extension of the recent blowout rally witnessed over the past two weeks or so. In the meantime, any corrective decline below the Asian session low, around the $2,336 area, is likely to find decent support and remain limited near the $2,300 mark. The said handle should act as a key pivotal point, which, if broken decisively, might prompt some technical selling and drag the Gold price further towards the $2,267-2,265 horizontal support.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
