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- The price of gold fell for the second day in a row amid the Federal Reserve’s hawkish outlook.
- A September Fed rate cut is still on the table, limiting US dollar gains.
- The ongoing geopolitical tensions are limiting the downtrend of the XAU/USD pair.
The price of gold (XAU/USD) traded with a moderate negative bias for the second day in a row on Wednesday and touched its lowest level in more than a week during the Asian session, although it lacked a subsequent sell-off. Overnight hardening comments by influencers Federal Reserve Federal Reserve officials have indicated that the US central bank is unlikely to begin an interest rate cutting cycle anytime soon amid a resilient US economy. This remains supportive of the modest rise in US Treasury yields, which is seen as a tailwind for the US Dollar (USD) and weighing on the non-yielding yellow metal.
Meanwhile, weak May consumer and producer prices keep a Fed rate cut in September on the table. This, coupled with the risk of further escalation of geopolitical tensions in the Middle East and the protracted war between Russia and Ukraine, provides some support to the safe-haven gold price and helps limit the downside. Traders may also prefer to wait for the key US macro data – the latest Q1 gross domestic product Inflation data is expected on Thursday and the PCE price index on Friday. The latter may influence the policy decisions of the Federal Reserve and give new impetus to the XAU/USD pair.
Daily Summary Market Movers: Gold bears appear uncommitted amid uncertainty over Fed rate cut
- Federal Reserve policymakers continue to argue in favor of keeping interest rates higher for longer, pushing up US Treasury yields and capping the upside for the price of non-yielding gold.
- Federal Reserve Governor Michelle Bowman expressed willingness to raise borrowing costs if the progress of inflation stalls and said on Tuesday that they have not yet reached the point where it is appropriate to cut interest rates.
- Separately, Fed Governor Lisa Cook indicated it would be appropriate to cut interest rates at some point, even though rising inflation expectations imply keeping monetary policy tight for longer.
- The US consumer confidence index fell to 100.4 in June from 101.3 the previous month amid concerns about the economic outlook, a Conference Board poll showed on Tuesday.
- This comes on top of recent weakness in US retail sales and signs of moderating inflationary pressures, keeping hopes alive for a Fed rate cut in September and acting as a headwind for the US dollar.
- The Russian Foreign Ministry summoned US Ambassador Lynn Tracy earlier this week and blamed the United States for the brutal attack in Crimea, and said retaliatory measures would “certainly follow.”
- Concerns about an all-out war between Israel and Lebanon remain in the wake of rising tensions due to Hezbollah provocations, helping to limit the downside for the safe-haven precious metal.
- Traders also appear reluctant to place strong directional bets and are now looking to the release of the Personal Consumption Expenditures (PCE) price index on Friday for some useful momentum.
Technical Analysis: Gold price stabilizes above the ascending trend line support near the $2,310 area
From a technical perspective, the recent failure to capitalize on strength beyond the 50-day SMA and subsequent slide favors bearish traders. Moreover, the oscillators on the daily chart have once again started to gain negative strength, indicating that the path of least resistance for gold price is to the downside. However, it is still wise to wait for a sustained break below the short-term rising trend line support, which is currently holding near the $2,310 area, before taking a position for further losses. The XAU/USD pair may then weaken further below the $2,300 level and retest the monthly low, around the $2,287-2,286 area. Some subsequent selling will confirm the downside bias and expose 100-day SMA support near the $2,250 area. The downward path may extend further towards the $2225-2220 region before the commodity eventually drops to the $2200 round figure mark.
On the flip side, any meaningful positive move now appears to be facing stiff resistance near the 50-day SMA, which is currently near the $2339-2340 area, ahead of Friday’s swing high, around the $2368 area. -$2369. Continuous strength beyond the latter can raise the level gold price Towards the medium hurdle of $2,387-$2,388 on its way to the round-figure mark of $2,400. Some subsequent buying will negate any near-term negative bias and allow XAU/USD to return to challenging the all-time peak, around the $2,450 area touched in May.
Frequently asked questions about inflation
Inflation measures the rise in the prices of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a monthly (MoM) and yearly (YoY) basis. Core inflation excludes more volatile items such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the number that economists focus on and is the level targeted by central banks, which are tasked with keeping inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a monthly (MoM) and yearly (YoY) basis. The core CPI is the number targeted by central banks because it excludes volatile food and fuel inputs. When the core CPI rises above 2%, it typically causes interest rates to rise and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually leads to a stronger currency. The opposite is true when inflation falls.
Although it may seem counterintuitive, high inflation in a country causes the value of its currency to rise and vice versa for lower inflation. This is because the central bank will typically raise interest rates to combat rising inflation, which attracts more global capital flows from investors looking for a profitable place to park their money.
Previously, gold was the asset investors turned to during times of high inflation because it maintained its value, and while investors often continue to buy gold for its safety properties in times of extreme market turmoil, this is not the case most of the time. . This is because when inflation is high, central banks will raise interest rates to combat it. High interest rates are negative for gold because they increase the opportunity cost of holding gold versus interest-bearing assets or putting money in a cash deposit account. On the flip side, lower inflation tends to be positive for gold because it lowers interest rates, making the shiny metal a more viable investment alternative.
