Gold price hangs near daily low amid modest USD strength, cautious market mood lends support
|- Gold price drifts lower for the second straight day amid reduced bets for a larger rate cut by the Fed.
- An uptick in the US bond yields underpins the USD and further contributes to the intraday downfall.
- Worries about an economic downturn in the US and geopolitical tensions should limit further losses.
Gold price (XAU/USD) remains under some selling pressure for the second successive day on Monday and languishes below the $2,500 psychological mark through the early European session. The mixed US jobs report released on Friday reduced the likelihood of a larger, 50 basis point rate cut by the Federal Reserve (Fed). This leads to a modest recovery in the US Treasury bond yields, which assists the US Dollar (USD) to build on its recovery from over a one-week low and turns out to be a key factor driving flows away from the non-yielding yellow metal.
Meanwhile, the unimpressive US Nonfarm Payrolls (NFP) report fuels worries about a downturn in the world's largest economy, which, in turn, could lend some support to the Gold price. Furthermore, the lack of progress in ceasefire negotiations between Israel and Hamas tempers investors' appetite for riskier assets and should contribute to limiting the downside for the safe-haven precious metal. This makes it prudent to wait for strong follow-through selling before positioning for an extension of Friday's pullback from the vicinity of the all-time peak.
Daily Digest Market Movers: Gold price is pressured by rising US bond yields and modest USD strength
- The US Bureau of Labor Statistics (BLS) reported on Friday that Nonfarm Payrolls (NFP) rose by 142,000 in August as compared to 160,000 expected and the previous month's downwardly revised reading of 89,000.
- Other details of the report showed that the Unemployment Rate edged lower to 4.2% from 4.3% in July and wage inflation, as measured by the change in Average Hourly Earnings, rose to 3.8% from the 3.6% previous.
- According to the CME Group's FedWatch tool, the markets are pricing around a 70% chance of a 25-basis-points rate cut by the Federal Reserve later this month and the probability of a 50-bps reduction stands at 30%.
- The US Dollar, which initially fell after the release of the jobs data, soon gained ground and traded slightly higher during the Asian session on Monday, which, in turn, is seen acting as a headwind for the Gold price.
- The mixed US jobs data provided clear evidence of a sharp deterioration in labor market and weighed on investors' sentiment amid persistent geopolitical tensions, which should offer support to the safe-haven XAU/USD.
- Data published by the People's Bank of China (PBOC) showed on Sunday that the country's gold holdings stood at 72.8 million fine troy ounces at the end of August, unchanged for the fourth successive month.
- Meanwhile, the markets reacted little to the latest Chinese inflation figures, showing that consumer prices rose for the seventh consecutive month in August, while producer price deflation persisted.
Technical Outlook: Gold price needs to break below the $2,470 horizontal support for bears to seize control
From a technical perspective, the Gold price has been oscillating in a familiar range over the past three weeks or so. This constitutes the formation of a rectangle on short-term charts and points to indecision among traders over the next leg of a directional move. The range-bound price action, however, might still be categorized as a bullish consolidation phase against the backdrop of a strong rally to the all-time peak. Moreover, oscillators on the daily chart – though have been losing traction – are still holding in the positive territory. Hence, any subsequent slide might still be seen as a buying opportunity near the $2,471-2,470 horizontal support.
The latter marks the lower boundary of the trading range and should act as a key pivotal point. A convincing break below might prompt some technical selling and expose the 50-day Simple Moving Average (SMA) support, currently pegged near the $2,443-2,442 region. The downward trajectory could extend further towards the $2,400 round-figure mark en route to the 100-day SMA, around the $2,390-2,389 zone. On the flip side, any meaningful move up now seems to confront stiff resistance near the $2,520 region ahead of the $2,530-2,532 area, or the all-time peak. Some follow-through buying will be seen as a fresh trigger for bullish traders and set the stage for a further near-term appreciating move.
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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