Gold price finds interim support, downside remains favored ahead of Powell speech
|- Gold price finds an intermediate support near a two-week low while appeal for US Dollar and bond yields remain upbeat
- Geopolitical tensions stay more or less unchanged fading the appeal of Gold.
- Fed’s Kashkari acknowledges the need for more work to control inflation.
Gold price (XAU/USD) recovers some losses while broader safe-haven demand remains diminished amid no further escalation in geopolitical tensions. A recovery in the US Dollar and long-term bond yields would continue to weigh on the precious metal.
Gold price weakens despite investors seeing an end to the Federal Reserve’s (Fed) rate-tightening campaign, due to gradually easing consumer inflation and higher Treasury yields, which have tightened financial conditions significantly.
Commentary from Federal Reserve Chairman Jerome Powell on Wednesday could drive further action in the US Dollar and bond markets. Powell may give an idea of whether investors should expect more interest rate hikes this year to ensure a return of inflation to the Fed’s 2% target.
Fed Governor Lisa Cook said that the current interest rate policy is sufficiently restrictive to achieve price stability on Monday; Fed’s Kashkari, on the other hand, reportedly said the opposite in a Wall Street Journal article published on the same day.
Fed Kashkari spoke again on Tuesday that if inflation starts to tick back up, that would tell me Fed's job is not yet done." He added that the labor market is robust and is not seeing any meaningful evidence that the economy is weakening.
Daily Digest Market Movers: Gold price remains on backfoot as US Dollar revives
- Gold price rebounds after correcting to near $1,956.00. The precious metal remains on backfoot amid a recovery in the US Dollar and bond yields as Federal Reserve policymakers lined up to give guidance on inflation and interest rates this week.
- Gold price fades on an absence of significant escalation in Middle East tensions.
- Israeli Prime Minister Benjamin Netanyahu has allowed entry of humanitarian aid to and the exiting of hostages from Gaza, but rejected a general ceasefire. Geopolitical tensions would keep broader demand for Gold intact.
- The US Dollar Index (DXY) discovered buyers’ interest marginally below the crucial support of 105.00 after commentary from Minneapolis Fed Bank President Neel Kashkari. The commentary from Kashkari indicated that he is leaning towards raising interest rates further.
- Kashkari commented that the economy is performing well despite higher interest rates. He added that the central bank has much work to do to ensure price stability.
- Contrary to Kashkari, Fed Governor Lisa Cook said the current monetary policy is adequate to bring down inflation to 2%. Cook commented that the US financial system is healthy enough to tackle economic challenges.
- The Fed kept interest rates unchanged in the 5.25-5.50% last week for the second time in a row on expectations that higher US bond yields are significantly tightening financial conditions, slowing overall demand and price pressures.
- The correction in Gold could conclude sooner and a revival is highly likely as investors hope that the Fed is done with hiking interest rates.
- A slowdown in labor demand and a decline in the Services PMI has cemented hopes that interest rates won’t be hiked further.
- As per the CME Fedwatch tool, traders see an 85% chance for interest rates remaining unchanged till the year-end.
- Meanwhile, 10-year US Treasury yields managed to attain a firm footing near 4.60% as investors shifted focus to the speech from Fed Chair Jerome Powell, scheduled for Wednesday.
- Powell is expected to provide guidance on the requirement of more interest rate hikes to ensure the achievement of price stability or a time period for which rates will remain elevated and some glimpse into the performance of the economy in the fourth quarter of 2023.
- Before Powell, speeches from other Fed policymakers: Christopher Waller and John C. Williams will be keenly watched.
Technical Analysis: Gold price finds support near $1,960
Gold price finds an intermediate support near $1,960.00 after a sharp sell-off. Earlier, the yellow metal plunged after several failed attempts to stabilize above the psychological resistance of $2,000. The precious metal is exposed to the 20-day Exponential Moving Average (EMA), which trades at around $1,960.00. The broader trend is still bullish as the 200-day EMA is sloping higher. Momentum oscillators demonstrate that the bullish momentum has faded.
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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