Gold price climbs back closer to weekly top amid geopolitical risks, ahead of US PPI
|- Gold price builds on the overnight bounce from a one-month low amid a softer USD.
- Despite a slightly hot US CPI, bets for a March Fed rate cut undermine the Greenback.
- An escalation of tensions in the Middle East further benefits the safe-haven XAU/USD.
Gold price (XAU/USD) gains positive traction for the second straight day on Friday and recovers further from a one-month low, around the $2,013 area, representing the 50-day Simple Moving Average (SMA) touched the precious day. The intraday ascent extends through the first half of the European session and is sponsored by an escalation of geopolitical tensions in the Middle East, which is seen benefitting the safe-haven precious metal. Adding to this, the US Dollar (USD) extends its range-bound price action amid the uncertainty over the Federal Reserve's (Fed) rate trajectory and turns out to be another factor underpinning the commodity.
Despite the aforementioned supportive fundamental backdrop, the Gold price remains below the $2,040-2,042 supply zone in the wake of diminishing odds for a more aggressive policy easing by the US central bank. This, in turn, acts as a tailwind for the US Treasury bond yields and holds back the USD bears from placing fresh bets. Hence, it will be prudent to wait for a strong follow-through buying beyond the said barrier before confirming that the precious metal's downtrend witnessed over the past two weeks or so has run its course.
Market participants now look forward to the release of the US Producer Price Index (PPI), which might infuse some volatility in the markets later during the early North American session amid bets that the Fed will start cutting interest rates in March. Apart from this, a scheduled speech by Minneapolis Fed President Neel Kashkari could influence the USD price dynamics and produce short-term trading opportunities around the Gold price. Nevertheless, the XAU/USD remains on track to register modest losses for the second successive week.
Daily Digest Market Movers: Gold price sticks to modest intraday gains amid geopolitical risks
- The mixed US consumer inflation figures raised expectations that the Federal Reserve could delay a much-anticipated rate cut in March and dragged the Gold price to a one-month low on Thursday.
- The headline US CPI accelerated from the 3.1% YoY rate to 3.4% in December, while the core gauge (excluding volatile food and energy prices) registered its smallest yearly gains since May 2021.
- Cleveland Fed President Loretta Mester commented on the latest CPI figures and said that it would likely be too soon for the US central bank to cut its interest rates at the March policy meeting.
- Adding to this, Richmond Fed chief Tom Barkin noted that the central bank needs to be convinced that inflation is headed to target and will be open to lowering rates once inflation is on track to 2%.
- Separately, Chicago Fed President Austan Goolsbee said that the central bank is still on a comfortable path forward on inflation and will have to evaluate policy restrictiveness as inflation continues to decline.
- According to the CME group's FedWatch Tool, the markets are still pricing in over a 65% probability of a rate cut in March, which is seen acting as a tailwind for the non-yielding yellow metal.
- The yield on the benchmark 10-year US government bond remains depressed below the 4.0% threshold, which keeps the US Dollar bulls on the defensive and benefits the non-yielding metal.
- The US and UK forces carried out attacks against multiple Houthi targets in reaction to drone and missile attacks on ships in the Red Sea, raising the risk of a further escalation of geopolitical tensions.
- US President Joe Biden said that the US will not hesitate to direct further measures after airstrikes on Houthi targets in Yemen.
- Adding to this, UK Prime Minister Rishi Sunak said that Britain will always stand up for freedom of navigation and free flow of trade.
- The Chinese inflation figures released this Friday fuel deflationary risks, while a 0.3% fall in imports during 2023 pointed to sluggish domestic demand and added to worries about slow economic recovery.
- The XAU/USD remains on track to end in the red for the second successive week as traders now look to the US Producer Price Index and Minneapolis Fed President Neel Kashkari's speech for a fresh impetus.
Technical Analysis: Gold price remains confined in a familiar trading range, below $2,040-2,042 barrier
From a technical perspective, the overnight bounce from the 50-day SMA and the subsequent move up as well as positive oscillators on the daily chart favour bullish traders. That said, it will still be prudent to wait for a sustained strength beyond the $2,040-2,042 supply zone before positioning for additional gains. The Gold price might then accelerate the momentum towards last Friday's swing high, around the $2,064 area, en route to the $2,077 area. Some follow-through buying will negate any near-term negative outlook and set the stage for a move towards reclaiming the $2,100 round figure.
On the flip side, the $2,022 area now seems to protect the immediate downside ahead of the multi-week low, around the $2,013 region, or the 50-day SMA tested on Thursday. A convincing break below the latter will be seen as a fresh trigger for bearish traders and drag the Gold price to the $2,000 psychological mark. The downward trajectory could extend further towards the December swing low, around the $1,973 region before the XAU/USD eventually drops to the $1,965-1,963 confluence, comprising the 100- and 200-day SMAs.
US Dollar price today
The table below shows the percentage change of US Dollar (USD) against listed major currencies today. US Dollar was the strongest against the Swiss Franc.
| USD | EUR | GBP | CAD | AUD | JPY | NZD | CHF | |
| USD | 0.03% | 0.01% | -0.03% | -0.15% | -0.09% | -0.13% | 0.09% | |
| EUR | -0.02% | -0.02% | -0.07% | -0.18% | -0.12% | -0.18% | 0.09% | |
| GBP | -0.01% | 0.02% | -0.04% | -0.15% | -0.10% | -0.16% | 0.10% | |
| CAD | 0.03% | 0.05% | 0.03% | -0.13% | -0.06% | -0.10% | 0.13% | |
| AUD | 0.15% | 0.17% | 0.15% | 0.11% | 0.05% | -0.01% | 0.25% | |
| JPY | 0.11% | 0.12% | 0.09% | 0.05% | -0.04% | -0.06% | 0.19% | |
| NZD | 0.12% | 0.18% | 0.15% | 0.10% | -0.01% | 0.05% | 0.24% | |
| CHF | -0.08% | -0.08% | -0.09% | -0.12% | -0.23% | -0.19% | -0.22% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).
Risk sentiment FAQs
What do the terms"risk-on" and "risk-off" mean when referring to sentiment in financial markets?
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.
What are the key assets to track to understand risk sentiment dynamics?
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.
Which currencies strengthen when sentiment is "risk-on"?
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.
Which currencies strengthen when sentiment is "risk-off"?
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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