- Gold gathered bullish momentum after reclaiming the $2,400 level this week.
- XAU/USD benefited from falling US Treasury bond yields after the Fed policy announcement, weak US data.
- Escalating geopolitical tensions, Fed rate cut expectations boost Gold.
After posting losses for two consecutive weeks, Gold (XAU/USD) rallied this one, gaining over 3% since Monday’s opening. Next week’s economic calendar will feature several high-tier data releases, but geopolitical developments could continue to impact the price action.
Gold benefits from escalating tensions in the Middle East
Gold started the week in a quiet manner as investors refrained from taking large positions ahead of key macroeconomic events. After closing the first trading day of the week virtually unchanged, however, XAU/USD gathered bullish momentum on Tuesday and climbed above $2,400.
Reports of Hamas’ political leader Ismail Haniyeh being killed in Iran during a visit to attend the inauguration ceremony of Iran’s newly elected President Masoud Pezeshkian caused geopolitical tensions to escalate. In response, Iran’s Supreme Leader Ayatollah Ali Khamenei has promised “harsh punishment” for Israel in retaliation for the death of Haniyeh. Gold benefited from growing fears over a deepening crisis in the Middle East and continued to push higher.
Meanwhile, the US Federal Reserve (Fed) announced on Wednesday that it left monetary policy settings unchanged, as widely expected. In the post-meeting press conference, Fed Chairman Jerome Powell noted that there was a “real discussion” about the case for reducing rates at the July meeting, adding that a rate cut could be on the table in September. Although a 25 basis points (bps) September rate cut was already fully priced in, according to the CME FedWatch Tool, the benchmark 10-year US Treasury bond yield turned south after the Fed event and lost over 2.5% on the day, providing an additional boost to Gold.
Disappointing macroeconomic data releases from the US caused US T-bond yields to decline further in the second half of the week. As the 10-year yield dropped below 4% for the first time since early February, Gold built on its weekly gains and climbed above $2,460. The number of applications for first-time unemployment benefits in the US rose to its highest level since August 2023 at 249,000 in the week ending July 27, and the ISM Manufacturing Purchasing Managers Index (PMI) dropped to 46.8 in July from 48.5 in June, reflecting an acceleration in the ongoing contraction in the manufacturing sector’s business activity.
On Friday, the US Bureau of Labor Statistics (BLS) reported that Nonfarm Payrolls rose 114,000 in July. Additionally, June’s increase of 206,000 got revised lower to 179,000. The Unemployment Rate edged higher to 4.3% from 4.2% in June and annual wage inflation, as measured by the change in Average Hourly Earnings, softened to 3.6% from 3.8%. The 10-year US yield slumped below 3.8% after dismal US jobs data and Gold surged above $2,470 in the American session.
Gold investors will keep a close eye on geopolitics
The ISM Services PMI for July will be featured in the US economic docket on Monday. Markets expect the headline PMI to rise to 51 from 48.8 in June. In case this data stays below 50, the US Dollar (USD) could have a hard time finding demand. On the other hand, a positive surprise could support the currency and cap XAU/USD’s upside with the initial reaction.
In the Asian session on Wednesday, Trade Balance data for July from China, the world’s biggest consumer of Gold, will be watched closely by market participants. A couple of weeks ago, the People’s Bank of China (PBoC) unexpectedly lowered the one-year Loan Prime Rate (LPR), the five-year LPR, and the one-year Medium-term Lending Facility (MLF) rate. These decisions revived fears over a worsening Chinese economic outlook and weighed on Gold. Hence, XAU/USD could lose its footing midweek if the Trade Balance data from China disappoints.
The economic calendar will not offer any other high-tier data releases that could impact Gold’s valuation next week. Nevertheless, investors will remain focused on headlines surrounding geopolitics and pay close attention to comments from Fed officials, now that the blackout period is over.
If Fed policymakers push back against the market expectation for multiple interest rate cuts this year, US Treasury bond yields could rebound and cause XAU/USD to stage a downward correction.
In case tensions in the Middle East continue to escalate with Iran taking retaliatory action, Gold is likely to continue to find demand as a safe haven.
Gold technical outlook
The Relative Strength Index (RSI) indicator on the daily chart rose above 60 following this week’s rally, suggesting that Gold has more room on the upside before turning technically overbought. $2,480 (static level) aligns as immediate resistance before $2,500 (psychological level). In case Gold stabilizes above $2,500 and confirms that level as support, the upper limit of the ascending regression channel coming from mid-February could be seen as the next bullish target at $2,600.
On the downside, the support area seems to have formed at $2,410-$2,400 (20-day Simple Moving Average (SMA), psychological level) before $2,365 (50-day SMA) and $2,340 (100-day SMA).
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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