Gold price oscillates in a range around $2,400 mark, Fed rate cut bets act as a tailwind
|- A combination of factors dragged the Gold price to over a one-week low on Monday.
- Bets that the Fed will cut rates in September could lend support and help limit losses.
- The US Q2 GDP on Thursday and Friday's US PCE data to provide fresh impetuses.
Gold price (XAU/USD) struggles to capitalize on the Asian session uptick on Tuesday, albeit manages to hold its neck above a more than one-week low touched the previous day. US President Joe Biden's withdrawal from the 2024 Presidential election increased the chances of Donald Trump becoming the next US President, raising hopes of a looser regulatory environment. Apart from this, unexpected interest rate cuts by the People's Bank of China (PBoC) on Monday remain supportive of the upbeat market mood and turn out to be a key factor acting as a headwind for the safe-haven precious metal.
That said, dovish Federal Reserve (Fed) expectations should help limit losses for the non-yielding Gold price. In fact, market participants seem convinced that the US central bank will start lowering borrowing costs in September and have been pricing in the possibility of two more rate cuts by year-end. This triggers a fresh leg down in the US Treasury bond yields, which keeps the US Dollar (USD) bulls on the defensive and lends support to the yellow metal. Hence, it will be prudent to wait for some follow-through selling before positioning for an extension of the recent pullback from the all-time peak.
Daily Digest Market Movers: Gold price lacks firm intraday direction amid mixed fundamental cues
- Investors reacted little to US President Joe Biden's decision to end his re-election campaign on Sunday amid expectations that the US equity market would benefit from Trump's proposed policies.
- Adding to this, the People's Bank of China (PBoC) surprised markets by cutting key short and long-term rates and provided an additional boost to the global risk sentiment.
- China's central bank lowered the one-year loan prime rate (LPR), the five-year LPR and the seven-day reverse repo rate by 10 basis points (bps) to 3.35%, 3.85% and 1.7%, respectively.
- The move comes in the wake of a disappointment from the lack of short-term stimulus to support the real economy from the Third Plenum meeting Chinese officials held last week.
- Nevertheless, the combination of factors triggered a fresh wave of the risk-on trade and turned out to be a key factor that led to the overnight downfall in the safe-haven Gold price.
- Moreover, a second Trump presidency is expected to be more inflationary, pushing the US Treasury bond yields higher and contributing to driving flows away from the XAU/USD.
- Meanwhile, money markets have fully priced in a rate cut by the Federal Reserve in September, which keeps the US Dollar bulls on the defensive and lends support to the yellow metal.
- Traders now look to Tuesday's US economic docket, featuring Existing Home Sales and the Richmond Manufacturing Index, for short-term opportunities later during the North American session.
- The market focus, however, will remain glued to Thursday's release of the Advance US Q2 GDP print and the US Personal Consumption Expenditures (PCE) Price Index data on Friday.
- Apart from this, investors, this week will confront the release of flash PMIs, which should provide cues about the health of the global economy and provide some impetus to the commodity.
Technical Analysis: Gold price could accelerate the fall once the $2,390-2,385 support is broken
From a technical perspective, the Gold price finds support and attracts some buyers near the $2,385 resistance breakpoint. The said area now coincides with the 100-period Simple Moving Average (SMA) on the 4-hour chart and the 50% retracement level of the June-July rally. This, in turn, should now act as a key pivotal point, which if broken decisively should pave the way for deeper losses. The Gold price might then slide to 61.8% Fibo. level, around the $2,366-2,365 region, en route to the $2,352-2,350 zone before eventually dropping to the 78.6% Fibo. level, near the $2,334-2,334 area, and the $2,300 mark.
On the flip side, any further move up is likely to confront some resistance near the $2,417-2,418 zone, above which a bout of a short-covering has the potential to lift the Gold price to the $2,437-2,438 region. A sustained strength beyond the latter will suggest that the corrective decline has run its course and shift the near-term bias back in favor of bullish traders. The subsequent rally has the potential to lift the XAU/USD back towards the all-time peak, around the $2,482 area touched on July 17, with some intermediate resistance near the $2,458 region.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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