- A combination of factors dragged the Gold price to over a one-week low on Monday.
- Bets that the Fed will cut rates in September could lend support and help limit losses.
- The US Q2 GDP on Thursday and Friday's US PCE data to provide fresh impetuses.
Gold price (XAU/USD) struggles to capitalize on the Asian session uptick on Tuesday, albeit manages to hold its neck above a more than one-week low touched the previous day. US President Joe Biden's withdrawal from the 2024 Presidential election increased the chances of Donald Trump becoming the next US President, raising hopes of a looser regulatory environment. This, along with unexpected interest rate cuts by the People's Bank of China (PBoC) on Monday, remains supportive of a generally positive risk tone and acts as a headwind for the safe-haven precious metal.
The downside for the Gold price, however, remains cushioned amid dovish Federal Reserve (Fed) expectations. In fact, market participants seem convinced that the US central bank will start lowering borrowing costs in September and have been pricing in the possibility of two more rate cuts by year-end. This triggers a fresh leg down in the US Treasury bond yields, which keeps the US Dollar (USD) bulls on the defensive and could offer some support to the non-yielding yellow metal, warranting some caution before positioning for an extension of the recent pullback from the all-time peak.
Daily Digest Market Movers: Gold price struggles to lure buyers amid positive risk tone
- Investors reacted little to US President Joe Biden's decision to end his re-election campaign on Sunday amid expectations that the US equity market would benefit from Trump's proposed policies.
- Adding to this, the People's Bank of China (PBoC) surprised markets by cutting key short and long-term rates and provided an additional boost to the global risk sentiment.
- China's central bank lowered the one-year loan prime rate (LPR), the five-year LPR and the seven-day reverse repo rate by 10 basis points (bps) to 3.35%, 3.85% and 1.7%, respectively.
- The move comes in the wake of a disappointment from the lack of short-term stimulus to support the real economy from the Third Plenum meeting Chinese officials held last week.
- Nevertheless, the combination of factors triggered a fresh wave of the risk-on trade and turned out to be a key factor that led to the overnight downfall in the safe-haven Gold price.
- Moreover, a second Trump presidency is expected to be more inflationary, pushing the US Treasury bond yields higher and contributing to driving flows away from the XAU/USD.
- Meanwhile, money markets have fully priced in a rate cut by the Federal Reserve in September, which keeps the US Dollar bulls on the defensive and lends support to the yellow metal.
- Traders now look to Tuesday's US economic docket, featuring Existing Home Sales and the Richmond Manufacturing Index, for short-term opportunities later during the North American session.
- The market focus, however, will remain glued to Thursday's release of the Advance US Q2 GDP print and the US Personal Consumption Expenditures (PCE) Price Index data on Friday.
- Apart from this, investors, this week will confront the release of flash PMIs, which should provide cues about the health of the global economy and provide some impetus to the commodity.
Technical Analysis: Gold price manages to hold above the $2,390-2,385 confluence support
From a technical perspective, the Gold price finds support and attracts some buyers near the $2,385 resistance breakpoint. The said area now coincides with the 100-period Simple Moving Average (SMA) on the 4-hour chart and the 50% retracement level of the June-July rally. This, in turn, should now act as a key pivotal point, which if broken decisively should pave the way for deeper losses. The Gold price might then slide to 61.8% Fibo. level, around the $2,366-2,365 region, en route to the $2,352-2,350 zone before eventually dropping to the 78.6% Fibo. level, near the $2,334-2,334 area, and the $2,300 mark.
On the flip side, any further move up is likely to confront some resistance near the $2,417-2,418 zone, above which a bout of a short-covering has the potential to lift the Gold price to the $2,437-2,438 region. A sustained strength beyond the latter will suggest that the corrective decline has run its course and shift the near-term bias back in favor of bullish traders. The subsequent rally has the potential to lift the XAU/USD back towards the all-time peak, around the $2,482 area touched on July 17, with some intermediate resistance near the $2,458 region.
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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