- A combination of supporting factors pushes the Gold price to a two-week high on Thursday.
- The Fed’s dovish stance drags the US bond yields lower and continues to weigh on the USD.
- The risk-on mood caps gains as bulls move to the sidelines ahead of the US NFP on Friday.
Gold price (XAU/USD) gained strong positive traction on Wednesday after the Federal Reserve (Fed) bolstered hopes for a rate cut as soon as September. The US Treasury bond yields tumbled across the board after the Fed decision, dragging the US Dollar (USD) to its lowest level since July 18 and benefiting the non-yielding yellow metal. Furthermore, the risk of a further escalation of geopolitical tensions in the Middle East benefitted the safe-haven commodity and lifted it to a two-week high during the Asian session on Thursday.
Meanwhile, the prospects for an imminent start of the Fed's policy-easing cycle trigger a fresh leg up in the equity markets. This, in turn, fails to assist the Gold price to capitalize on the move and attracts some intraday sellers near the $2,458-2,459 region. Nevertheless, the fundamental backdrop seems tilted firmly in favor of the XAU/USD bulls. Hence, any subsequent pullback might be seen as a buying opportunity and remain limited as traders now look to the US Nonfarm Payrolls (NFP) report on Friday for a fresh impetus.
Daily Digest Market Movers: Gold price bulls turn cautious amid risk-on mood, dovish Fed to limit downside
- The Federal Reserve decided to hold its benchmark interest rate steady in the 5.25%-5.50% range while acknowledging the recent progress on inflation and cooling in the labor market.
- Furthermore, Fed Chair Jerome Powell, speaking at the post-meeting press conference, signaled the likelihood of a rate cut in September if inflation stays in line with expectations.
- This comes on top of the disappointing release of the ADP report, which indicated a slowing in the labor market and wage growth, giving the Fed another reason to cut rates this year.
- The Automatic Data Processing (ADP) reported that private sector employment in the US rose 122K in July against the 150K expected and annual pay was up 4.8% year-over-year.
- The yield on the 10-year US government bond dived to its lowest level since February in reaction to the weak data and the Fed's dovish outlook, prompting aggressive US Dollar selling.
- Apart from this, geopolitical risks stemming from the ongoing conflicts in the Middle East further underpin demand for the safe-haven Gold price and lift it to a fresh two-week high on Thursday.
- The upside for the XAU/USD, however, could be limited by the risk-on impulse as traders now look to Friday's release of the US Nonfarm Payrolls report for some meaningful impetus.
Technical Analysis: Gold price set-up supports prospects for emergence of dip-buyers at lower levels
From a technical perspective, the overnight breakout through the $2,412-2,413 horizontal resistance comes on the back of the recent bounce from the 50-day Simple Moving Average (SMA) support. Moreover, the subsequent move beyond the $2,450 level, along with the fact that oscillators on the daily chart have been gaining positive traction, validates the near-term bullish outlook for the Gold price. Hence, some follow-through strength towards the next relevant hurdle near the $2,468-2,469 region, en route to the $2,483-2,484 zone, or the all-time peak touched in July, looks like a distinct possibility. The latter is followed by the $2,500 psychological mark, which if cleared decisively will be seen as a fresh trigger for bullish traders and pave the way for additional near-term gains.
On the flip side, the Asian session low, around the $2,437 area, now seems to protect the immediate downside ahead of the $2,432 region. Any further downfall could now be seen as a buying opportunity and remain limited near the $2,413-2,412 resistance breakpoint. That said, some follow-through selling, leading to a breakdown through the $2,400 mark, could make the Gold price vulnerable to test the $2,384-2,383 support zone. The downward trajectory could extend further towards challenging the 50-day SMA, currently pegged near the $2,363 region, en route to the $2,353 area, or last week's swing low.
Risk sentiment FAQs
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.
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.
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.
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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