- Gold price corrects further from the record high amid some follow-through USD buying.
- September Fed rate cut bets should cap the USD and help limit losses for the XAU/USD.
- The technical setup supports prospects for the emergence of dip-buying near $2,400.
Gold price (XAU/USD) maintains its offered tone through the Asian session on Friday and is currently placed near a multi-day low, around the $2,425 region. The US Dollar (USD) builds on the previous day's solid recovery from a four-month low and turns out to be a key factor dragging the commodity lower for the third successive day. Apart from this, some profit-taking, especially after the recent rally of over 6.5% since the beginning of this month, further contributes to the decline, though the downside seems limited.
Investors now seem convinced that the Federal Reserve (Fed) will start lowering borrowing costs in September and have been pricing in the possibility of two more rate cuts by year end. This keeps the US Treasury bond yields on the defensive and should cap the USD. Apart from this, the risk-off mood could lend support to the safe-haven Gold price. Furthermore, geopolitical tensions and central bank demand should help limit any meaningful depreciating move for the non-yielding yellow metal.
Daily Digest Market Movers: Gold price remains depressed amid a further USD recovery
- The US Dollar builds on the previous day's strong recovery from its lowest level since March 21 and drags the Gold price lower for the third successive day on Friday.
- The US Bureau of Labor Statistics (BLS) reported on Thursday that the number of Americans filing for unemployment benefits in the week ending July 13 rose to 243K.
- Additional details of the report revealed that the 4-week moving average swelled to the highest level in more than 2-1/2 years, pointing to a loosening labor market.
- This, along with ebbing inflation, paves the way for an imminent start of the Federal Reserve's rate-cutting cycle, offsetting the upbeat US manufacturing data.
- In fact, the Philadelphia Fed Manufacturing Index remained in positive territory for a sixth straight month and rose to 13.9 from 1.3 in the previous month.
- Nevertheless, the CME Group's FedWatch Tool indicates that markets are pricing in a 100% chance of a rate-cut in September and an additional two cuts by year-end.
- Meanwhile, former President Donald Trump said that Taiwan should pay the US for defense, raising doubts over the US commitment to defend Taiwan in the event of an attack by China.
- This comes on top of geopolitical tensions stemming from conflicts in the Middle East and the protracted Russia-Ukraine war, which should lend support to the XAU/USD.
Technical Analysis: Gold price could accelerate the fall once $2,390-2,385 support is broken
From a technical perspective, any subsequent fall is likely to find decent support near the $2,413-2,412 area ahead of the $2,400 round-figure mark. This is followed by the $2,390-2,385 horizontal resistance breakpoint, now turned support, which, if broken decisively, might prompt some technical selling. The Gold price might then accelerate the downfall toward testing the 50-day Simple Moving Average (SMA) support, currently pegged near the $2,359-2,358 region. Sustained weakness below the latter could expose the 100-day SMA near the $2,311 zone, with some intermediate support near the $2,330-2,328 region.
On the flip side, the Asian session high, around the $2,445 area, now seems to act as an immediate hurdle, above which the Gold price could climb to the $2,469-2,470 region. Given that oscillators on the daily chart are still holding comfortably in positive territory, bulls might then aim to retest the all-time peak, near the $2,483-2,484 region, and conquer the $2,500 psychological mark.
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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