Gold price attracts some buyers, potential upside seems limited amid risk-on/stronger US Dollar
|- Gold price remains close to a nearly two-month top set on Monday amid rising Fed rate cut bets.
- The markets are now pricing in a greater chance for the start of the rate-cutting cycle in September.
- The risk-on mood, along with a modest US Dollar strength, might cap the upside for the XAU/USD.
Gold price (XAU/USD) edges higher for the second successive day on Tuesday – also marking the fifth day of a positive move in the previous six – and climbs above the $2,430 level during the early European session. The precious metal, however, remains below its highest level since May 20 touched on Monday amid the emergence of some US Dollar (USD) buying. Apart from this, the prevalent risk-on environment contributes to capping the upside for the safe-haven commodity.
The near-term bias, meanwhile, seems tilted firmly in favor of bullish traders amid growing acceptance that the Federal Reserve (Fed) will start cutting interest rates in September. The bets were reaffirmed by the overnight comments from Fed Chair Jerome Powell, which keeps the US Treasury bond yields depressed and validate the positive outlook for the non-yielding yellow metal. Traders now look to the release of the US monthly Retail Sales data for a fresh impetus.
Daily Digest Market Movers: Gold price struggles to capitalize on intraday gains amid risk-on and modest USD strength
- Federal Reserve Chair Jerome Powell said on Monday that the recent inflation data had added to confidence that price increases are returning to the target in a sustainable fashion.
- The US Labor Department reported last week that the headline CPI dipped in June for the first time in more than four years, and the yearly rate decelerated to 3% from 3.3% in May.
- Powell added that the Fed doesn't expect to wait until inflation reaches 2% before acting, suggesting that rate cuts may not be far off and lending some support to the Gold price.
- The current market pricing indicates a greater chance that the Fed will lower borrowing costs in September and the possibility of another interest rate cut by the end of this year.
- The US Dollar, meanwhile, gains some positive traction and moves away from over a three-month low touched on Monday, which might cap any further gains for the commodity.
- Apart from this, an extension of the risk-on rally across the global equity markets should contribute to keeping a lid on the safe-haven XAU/USD ahead of the US Retail Sales.
- According to the consensus estimates, the headline sales are expected to remain flat in May, while sales excluding automobiles are forecasted to rise by 0.1% during the reported month.
Technical Analysis: Gold price bulls not ready to give up yet, might still aim to retest all-time peak near $2,450 area
From a technical perspective, last week's breakout through the $2,390-2,388 supply zone and sustained strength above the $2,400 mark favors bullish traders. Furthermore, oscillators on the daily chart hold in positive territory and are still away from being in the overbought zone, suggesting that the path of least resistance for the Gold price is to the upside. Hence, a subsequent strength towards challenging the all-time peak, around the $2,450 area touched in May, looks like a distinct possibility. Some follow-through buying will be seen as a fresh trigger for bullish traders and pave the way for an extension of the recent uptrend witnessed over the past three weeks or so.
On the flip side, dips below the $2,400 round figure could now be seen as a buying opportunity and remain limited near the $2,390-2,388 resistance breakpoint. Some follow-through selling, however, could drag the Gold price to the $2,358 region with some intermediate support near the $2,372-2,371 area. The subsequent fall might expose the 50-day Simple Moving Average (SMA) support, currently pegged near the $2,350 region.
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.
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