- Gold price hovers near a two-week high.
- Bets for a September rate cut by the Fed continue to lend support to the XAU/USD.
- The overnight rise in the US bond yields underpins the USD and caps the upside.
Gold price (XAU/USD) remains confined in a range during the European session on Friday and consolidates the previous day's strong move up to a two-week high, around the $2,360-2,365 area. The US Treasury bond yields look to build on Thursday's strong move up in anticipation of new supply next week, which, in turn, is seen as a key factor acting as a headwind for the commodity. That said, Thursday's softer US data reaffirmed expectations for an imminent start of the Federal Reserve's (Fed) rate-cutting cycle later this year. This fails to assist the US Dollar (USD) in attracting any follow-through buyers and should act as a tailwind for the non-yielding yellow metal.
Meanwhile, the Bank of England's (BoE) dovish outlook on Thursday lifted bets for an interest rate cut in August. Furthermore, the European Central Bank (ECB) earlier this month decided to lower borrowing costs and the Swiss National Bank (SNB) also delivered its second rate cut of 2024 on Thursday. This, along with a sustained breakout through the 50-day Simple Moving Average (SMA) on Thursday, favors bullish traders and suggests that the path of least resistance for the Gold price is to the upside. Hence, any corrective slide might be seen as a buying opportunity and is more likely to remain limited as traders look to the flash global PMIs for a fresh impetus.
Daily Digest Market Movers: Gold price exhibits broader strength due to firm September Fed rate cut bets
- Disappointing US economic data released on Thursday reinforced market expectations that the Federal Reserve will start its easing program soon and lifted the Gold price to a two-week high.
- The US Department of Labor (DoL) reported that the number of Americans applying for unemployment insurance fell to 238K in the week ending June 15 compared to the 235K expected.
- Moreover, the Commerce Department's Census Bureau said Housing Starts declined 5.2% to a seasonally adjusted annual rate of 982K units in May, and Building Permits fell 2.9% to 949K units.
- Adding to this, the Philadelphia Fed Manufacturing Index unexpectedly declined to 1.3 in June from 4.5 in the previous month, though it remained in positive territory for a fifth successive month.
- This comes on top of tepid US Retail Sales figures for May and signs of easing inflation, which keeps a September rate cut on the table and should lend support to the non-yielding yellow metal.
- The markets are also pricing in the possibility of another interest rate cut at the December policy meeting despite the Fed policymakers' hawkish outlook, indicating only one rate cut this year.
- Minneapolis Fed President Neel Kashkari argued that the US economy has proven to be remarkably resilient and that it will probably take a year or two to get inflation back to the 2% target.
- Richmond Fed President Tom Barkin noted that the US central bank has sufficient firepower to address policy issues, but it will have to maintain a strict data-dependent approach.
- The US Treasury bond yields shook off softer US data and rose on Thursday in anticipation of new supply next week, pushing the US Dollar to the weekly top and capping gains for the XAU/USD.
- Investors now look forward to the release of flash PMI prints for cues about the health of the global economy, which should provide some impetus ahead of the US Existing Home Sales data.
Technical Analysis: Gold price approaches $2,400
From a technical perspective, the overnight sustained close above the 50-day SMA could be seen as a fresh trigger for bullish traders. This, along with the fact that oscillators on the daily chart have again started gaining positive traction, supports prospects for a further appreciating move. Hence, a subsequent move towards testing the next relevant hurdle, near the $2,378-2380 region, looks like a distinct possibility. The Gold price could eventually aim to reclaim the $2,400 round-figure mark.
On the flip side, the 50-day SMA, currently pegged near the $2,345-2,344 area, now seems to protect the immediate downside ahead of the $2,336-2,335 region. A convincing break below the latter might expose the $2,300 round figure and the $2,285 horizontal support. Some follow-through selling will set the stage for the resumption of the recent retracement slide from the all-time peak touched in May and drag the Gold price further towards the $2,254-2,253 zone.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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