- Gold prices attracted some buyers, reversing some of Friday’s declines from a two-week high.
- Expectations of a Fed rate cut in September and geopolitical risks are giving XAU/USD some support.
- The US dollar has risen to its highest level since May 9, creating a headwind for commodities.
Gold prices (XAU/USD) have found some support around $2,317 during Monday’s Asian session, and for now appear to have halted a pullback from Friday’s two-week high. Signs of easing inflationary pressures have led to growing expectations that the Federal Reserve will begin its rate-cutting cycle in September, providing a tailwind for the low-yielding metal. This, plus an easing risk tone, continued geopolitical tensions and political uncertainty in Europe, have also supported the safe haven asset.
Meanwhile, better-than-expected US PMIs released on Friday suggest the economy remains strong. This follows a hawkish surprise earlier this month when the Fed predicted just one rate cut in 2024, which should continue to support the US Dollar (USD) and limit any big gains in gold prices. Traders may prefer to stay on the sidelines before placing any new directional bets ahead of the release of US Q1 GDP final figures and personal consumption expenditures (PCE) price indexes this week.
Daily Digest Market Trends: Gold prices benefit from expected Fed rate cut, but stronger US dollar limits gains
- A combination of opposing forces has failed to provide any meaningful impetus to gold prices, leading to contained, range-bound price movement on the first day of the new week.
- The Fed adopted a more hawkish stance at the end of its June meeting, but policymakers continue to argue in favor of just one rate cut before the end of the year.
- Additionally, better than expected US preliminary PMI data released on Friday pushed the US dollar to its highest level since May 9th, acting as a key headwind for commodities.
- The preliminary U.S. composite PMI rose to 54.6 this month from 54.5 in May, the highest level since April 2022, signaling the economy finished the second quarter on a strong note.
- Meanwhile, the input price index fell to 56.6 from 57.2, and the output price index fell to 53.5, one of the slowest rates of increase in the past four years.
- This comes against the backdrop of softening U.S. consumer and producer prices, which, combined with disappointing U.S. retail sales figures released last week, leaves two rate cuts this year open to possibility.
- According to CME Group’s FedWatch tool, the market is currently pricing in a more than 60% chance that the Federal Reserve will begin cutting interest rates at its September meeting.
- The US central bank is expected to further cut borrowing costs in December, which will act as a headwind for Treasury yields and support XAU/USD.
- The security agreement signed in Pyongyang by Russian President Vladimir Putin and North Korean leader Kim Jong Un raises the risk of further escalation of geopolitical tensions.
- Moreover, French President Emmanuel Macron’s decision to call early general elections has raised concerns about further political uncertainty, which should limit any declines in safe-haven gold.
- Traders will continue to take their cues from comments by FOMC members ahead of the release of U.S. GDP final figures and personal consumption expenditures (PCE) price index this week.
Technical reasons why: Gold prices are trading above short-term uptrend line support
From a technical perspective, Friday’s drop can be classified as a failure to break through the 50-day simple moving average (SMA) resistance. However, the subsequent decline has stalled in front of the two-week-old ascending trend line support currently anchored around $2,312, which should now be a key turning point. Given that the oscillator on the daily chart has only just started to trade in the negative territory, a firm break below this support would raise the risk that gold prices could sink below the $2,300 level and retest the monthly swing low near the $2,285 horizontal zone. Any follow-through selling that occurs could be seen as a new trigger for bearish traders, exposing the 100-day SMA support around $2,247-2,246. The downward trajectory could further extend towards the $2,225-2,220 support before the commodity finally drops to the fractional $2,200 level.
Meanwhile, the 50-day SMA, currently hovering around $2,341-2,342, is likely to act as a strong hurdle in the immediate term ahead of Friday’s high around $2,368-2,369. Continued follow-through buying could see gold prices rise towards the intermediate hurdle of $2,387-2,388 and towards the $2,400 cut-off level. A sustained bullish move above the latter would negate the short-term negative outlook and see XAU/USD target a retest of the all-time high around $2,450 recorded in May.
Gold FAQ
Gold has played a vital role throughout human history, as it has been widely used as a store of value and a medium of exchange. Today, apart from its luster and use in jewellery, the precious metal is widely recognised as a safe haven asset and considered a good investment during volatile times. Gold is also widely seen as a hedge against inflation and currency depreciation, as it is not dependent on any particular issuer or government.
Central banks are the largest holders of gold. To support their currencies in times of uncertainty, central banks tend to buy gold to diversify their reserves and to impress upon them the strength of their economies and currencies. Large gold reserves can be a source of confidence in a country’s solvency. According to data from the World Gold Council, central banks added 1,136 tonnes of gold worth about $70 billion to their reserves in 2022, the highest annual purchase since records began. Central banks in emerging countries such as China, India and Turkey are rapidly increasing their gold reserves.
Gold is inversely correlated with the US Dollar and US Treasury Bonds, which are the primary reserve and safe haven assets. When the US Dollar falls, gold tends to rise, allowing investors and central banks to diversify their assets during volatile times. Gold is also inversely correlated with risk assets. Rising stock markets tend to drive gold prices down, while sell-offs in risky markets tend to favor the precious metal.
Gold prices fluctuate due to a variety of factors. Geopolitical instability or fears of a deep recession can send gold prices soaring due to gold’s status as a safe haven. As a non-yielding asset, gold tends to rise in value the lower interest rates are, but rising cost of funds typically weighs on gold. Still, since the asset is priced in dollars (XAU/USD), most of the movement is determined by the movement of the US Dollar (USD). A strong dollar tends to keep gold prices in check, while a weak dollar can boost gold prices.
