Gold price drifts lower as traders await US inflation data for cues about Fed's rate-cut path
|Most recent article: Gold hits resistance after rallying on lower yeilds and geopolitical tensions
- Gold price pulls back from the vicinity of the monthly peak retested earlier this Tuesday.
- Bulls opt to lighten their bets amid a positive risk tone and ahead of the US inflation data.
- Geopolitical risks and bets for a 50-bps rate cut by the Fed should help limit the downside.
Gold price (XAU/USD) attracts some sellers in the vicinity of the monthly peak tested earlier this Tuesday and erodes a part of the previous day's strong gains of more than 1%. A generally positive tone around the equity markets undermines demand for traditional safe-haven assets and exerts some pressure on the precious metal amid some repositioning trade ahead of the closely-watched US inflation data. That said, a combination of supporting factors should lend some support to the commodity and help limit deeper losses.
Investors remain worried about the possibility of a wider conflict in the Middle East and the protracted Russia-Ukraine war. This could keep a lid on the market optimism. Furthermore, dovish Federal Reserve (Fed) expectations fail to assist the US Dollar (USD) to attract any meaningful buyers and should act as a tailwind for the non-yielding Gold price. Hence, it will be prudent to wait for strong follow-through selling before confirming that the recent positive move witnessed over the past week or so has run out of steam.
Daily Digest Market Movers: Gold price drifts lower amid some repositioning trade ahead of the US inflation data
- Israel stepped up its operations near the southern Gaza city of Khan Younis on Monday amid the risk of a broader conflict in the Middle East, boosting demand for the safe-haven Gold price.
- Israel is also preparing for the possibility of an imminent attack by Iran and the Lebanese group Hezbollah in retaliation for the assassination of Hamas leader Ismail Haniyeh in Tehran in late July.
- Russian President Vladimir Putin told Ukraine to expect a worthy response to its recent cross-border incursion into western parts of the Kursk region, which was about 12 km deep and 40 km wide.
- This comes on top of market expectations for a bigger, 50 basis points interest rate cut by the Federal Reserve in September and continues to act as a tailwind for the non-yielding yellow metal.
- The upside for the XAU/USD, however, remains capped in the wake of a positive risk tone and as traders opt to move to the sidelines ahead of the critical US inflation figures.
- The US Producer Price Index (PPI) is due on Tuesday, followed by the US Consumer Price Index (CPI) on Wednesday and should provide fresh cues about the Fed's policy path.
- The readings are expected to show that inflation cooled in July, giving the US central bank headroom to start its policy-easing cycle, supporting prospects for further gains for the commodity.
Technical Analysis: Gold price seems poised to retest all-time peak, dip-buying should help limit deeper losses
From a technical perspective, the overnight breakout through the $2,448-2,450 horizontal resistance was seen as a fresh trigger for bullish traders. Moreover, oscillators on the daily chart have been gaining positive traction and further suggest that the path of least resistance for the Gold price is to the upside. Hence, a subsequent move back towards challenging the record high, around the $2,483-2,484 area, looks like a distinct possibility. This is followed by the $2,500 psychological mark, which if cleared decisively will set the stage for an extension of the upward trajectory.
On the flip side, the $2,450-2,448 resistance breakpoint now seems to protect the immediate downside, below which the Gold price could slide back to the overnight swing low around the $2,424-2,423 region. The next relevant support is pegged near the $2,412-2,410 area ahead of the $2,400 round-figure mark. A convincing break below could expose the 50-day Simple Moving Average (SMA) support near the $2,376-2,375 region, which should act as a key pivotal point. Some follow-through selling could drag the Gold price to the late July low, around the $2,353-2,352 area. The latter coincides with the 100-day SMA and a sustained weakness below will shift the near-term bias in favor of bearish traders.
Interest rates FAQs
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.
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.
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.
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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