- Gold price struggles to build on its recovery from over a one-week low set on Tuesday.
- Bets for a less dovish Fed, elevated US bond yields and a bullish USD cap the upside.
- Traders keenly await the crucial FOMC decision before placing fresh directional bets.
Gold price (XAU/USD) attracts fresh sellers following an Asian session uptick to the $2,652 region, albeit it manages to hold its neck above a more than one-week low touched on Tuesday. Expectations that the Federal Reserve (Fed) will adopt a more cautious stance on cutting interest rates remain supportive of elevated US Treasury bond yields. This, in turn, is seen acting as a tailwind for the US Dollar (USD) and undermining demand for the non-yielding yellow metal.
Traders, however, might refrain from placing aggressive directional bets and opt to wait for the outcome of a two-day FOMC policy meeting later this Wednesday. Furthermore, persistent geopolitical risks stemming from the protracted Russia-Ukraine war and tensions in the Middle East, along with trade war fears, could support the safe-haven precious metal. This, in turn, warrants caution before positioning for an extension of the recent pullback from a one-month peak.
Gold price bulls remain on the defensive amid elevated US bond yields, ahead of Fed rate decision
- The US Census Bureau reported on Tuesday that Retail Sales jumped 0.7% in November, better than the market expectation for an increase of 0.5% and the 0.4% increase recorded in the previous month.
- The data was consistent with strong underlying momentum in the economy, though it had little impact on bets that the Federal Reserve will cut interest rates at the end of a two-day meeting on Wednesday.
- The robust consumer spending, along with the US economic resilience and warmer inflation prints in recent months, suggests that the Fed could pause its rate-cutting cycle at the January meeting.
- The prospects for a less dovish Fed pushed the yield on the benchmark 10-year US government bond to its highest level since November 22 and should act as a headwind for the non-yielding Gold price.
- Ukraine claims a blast in Moscow that killed the head of the Russian military’s nuclear and chemical weapons protection forces, Igor Kirillov, on Tuesday, raising the risk of a further escalation of tensions.
- The UN’s special envoy for Syria warned that the conflict has not ended even after the ousting of President Bashar al-Assad amid clashes between Turkish-backed and Kurdish groups in the north.
- A Palestinian official involved in the indirect negotiations said that there are signs that Israel and Hamas could be moving closer to a Gaza ceasefire and hostage release deal after months of deadlock.
- Wednesday's US economic docket features the release of housing market data – Building Permits and Housing Starts. The focus, however, will remain glued to the crucial FOMC monetary policy decision.
- Meanwhile, investors will closely scrutinize the updated economic projections and Fed Chair Jerome Powell's remarks for cues about the future rate-cut path, which will drive the US Dollar demand.
Gold price consolidates in a range; overnight swing low near the $2,633 area holds the key for bulls
From a technical perspective, any subsequent move up might face a hurdle near the weekly top, around the $2,664-2,666 region touched on Monday, ahead of the $2,677 area. A sustained strength beyond the latter should allow the Gold price to reclaim the $2,700 round figure. The subsequent move up could extend further towards the monthly swing high, around the $2,726 zone, above which the XAU/USD is likely to resume its upward trajectory.
On the flip side, the overnight swing low, around the $2,633 region, now seems to protect the immediate downside ahead of the monthly trough, around the $2,614 zone. This is closely followed by the $2,600 mark, which if broken decisively will be seen as a fresh trigger for bearish traders and make the Gold price vulnerable to resume its recent sharp pullback from over a one-month peak touched last week.
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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