Gold price struggles to capitalize on modest intraday recovery from multi-month low
|- Gold price drifts lower for the seventh day and drops to a near seven-month low on Tuesday.
- The Fed’s hawkish outlook, elevated US bond yields and a bullish USD weighs on the XAU/USD.
- The US Dollar enters a bullish consolidation phase and lends some support to the XAU/USD.
Gold price (XAU/USD) has been trending lower over the past two weeks or so in the wake of the Federal Reserve (Fed) signal that sticky inflation was likely to attract at least one more rate hike in 2023. Moreover, several Fed officials backed the case to keep rates restrictive for longer to bring inflation to the 2% target. Adding to this, the incoming resilient macro data from the United States (US) supports prospects for further policy tightening by the Fed. This, in turn, remains supportive of elevated US Treasury bond yields, which lifts the US Dollar (USD) to its highest level since November 2022 and drives flows away from the non-yielding yellow metal.
The downward trajectory prolongs for the seventh successive day on Tuesday and drags the Gold price to its lowest level since March 9 during the Asian session. That said, a mildly softer tone surrounding the US Treasury bond yields holds back the USD bulls from placing fresh bets and assists the precious metal to find some support near the $1,815 level. The XAU/USD manages to recover a major part of its intraday losses, through lacks follow-through in the wake of hawkish Fed expectations and the underlying strong bullish sentiment surrounding the USD. This, in turn, suggests that the path of least resistance for the commodity is to the downside.
Daily Digest Market Movers: Gold price bounces off multi-month low, lacks follow-through
- Gold price registers its longest losing streak since August 2022 in the wake of rising bets for more interest rate hikes by the Federal Reserve.
- Fed officials reiterate that monetary policy will need to stay restrictive for some time to bring inflation back down to the 2% target.
- Fed Governor Michelle Bowman is willing to support raising rates further if the incoming data indicates that progress on inflation has stalled or is too slow.
- Fed Vice Chair Michael Barr said that the important question at this point is how long to hold rates at a sufficiently restrictive level to achieve the goals.
- Cleveland Fed President Loretta Mester also said that risks to inflation are tilted toward the upside and higher rates are needed to make sure the disinflation process continues.
- The US ISM Manufacturing PMI recorded its highest reading since November 2022 and increased to 49.0 in September, marking improvement for the third straight month.
- Moreover, the rise in consumer spending, along with surging gasoline prices, points to higher prices going forward and supports prospects for further policy tightening.
- Markets are now pricing in a 45% chance of another 25 basis point (bps) rate hike this year and the outlook pushes the yield on the benchmark 10-year US government bond to a 16-year peak.
- The US Dollar consolidates its recent strong gains to the highest level since November 2022 amid mildly softer US Treasury bond yields and lends some support to the Gold price.
Technical Analysis: Gold price remains vulnerable to extend its recent downfall
The Relative Strength Index (RSI) on the daily chart is flashing extremely oversold conditions and was seen as a key factor that prompted some intraday short-covering around the Gold price. The lack of any follow-through buying, meanwhile, suggests that the recent downtrend might still be far from being over. Hence, any subsequent move up might still be seen as a selling opportunity and remain capped near the $1,830-1,832 resistance zone. A sustained strength beyond, however, might trigger a short-covering rally and lift the yellow metal to the $1,850 intermediate hurdle en route to the $1,858-1,860 strong barrier. On the flip side, the daily swing low, around the $1,815 level, could protect the immediate downside ahead of the $1,800 round-figure mark. Some follow-through selling will expose the next relevant support near the $1,770-1,760 region.
Interest rates FAQs
What are interest rates?
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
How do interest rates impact currencies?
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
How do interest rates influence the price of Gold?
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
What is the Fed Funds rate?
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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