- Gold prices hit new highs on Thursday on the back of dovish expectations from the Federal Reserve.
- Amid a risk-on mood and overbought conditions, modest gains in the US dollar are capping gains.
- Traders are now looking forward to the US PCE price index before betting on the direction.
Gold prices (XAU/USD) fell during Asian trading on Friday, but lacked follow-through and remain within range of the all-time highs reached a day earlier. The U.S. dollar (USD) attracted some buyers, reversing some of the previous day's losses, amid some repositioning trading ahead of the key U.S. personal consumption expenditure (PCE) price index. This, combined with the upbeat mood in the market, is a headwind for safe-haven commodities, which are overbought on the daily charts.
That said, expectations for more aggressive policy easing from the Federal Reserve should limit any meaningful dollar appreciation. Separately, sustained geopolitical tensions resulting from ongoing conflicts in the Middle East tend to benefit traditional safe-haven assets and should help limit the downside in gold prices. Traders may also want to wait for the release of US inflation data, which could influence the Fed's rate cut path and provide fresh impetus to the non-yielding yellow metal.
Daily Digest Market movements: Gold prices pressured by moderate US dollar strength and risk-on mood
- Federal Reserve President Michelle Bowman once again defended her decision to vote against a major interest rate cut in September, saying upside risks to inflation remain significant. .
- Atlanta Fed President Rafael Bostic warned earlier this week that the Fed doesn't need to rush to cut rates, but other Fed officials left open the possibility of a big rate cut.
- Fed Governor Cook said Thursday he supports last week's 50 basis point rate cut as upside risks to inflation have receded and downside risks to employment have increased.
- Market participants believe there is a greater than 50% chance that the Fed will cut borrowing costs by 50 basis points at its November policy meeting, according to CME Group's FedWatch tool.
- The U.S. economy grew at an annualized rate of 3% in the second quarter, in line with earlier expectations, according to data released Thursday by the U.S. Bureau of Economic Analysis (BEA).
- Separately, the U.S. Census Bureau reported that new orders for durable goods stalled in August, while orders excluding transportation rose 0.5% last month.
- In addition, the U.S. Department of Labor announced that the number of first-time claims for state unemployment benefits for the week ending September 21 fell to 218,000, the lowest level since mid-May.
- The data gave USD bulls some respite during the day, but the market's initial reaction proved short-lived following dovish Fed expectations.
- Separately, further escalation of geopolitical tensions in the Middle East and the risk of broader regional conflict has pushed the price of safe-haven gold to new record highs.
- Meanwhile, the rate cut is expected to boost global economic activity, which, combined with China's economic stimulus, accelerates the risk-on rally and caps XAU/USD.
- The People's Bank of China (Central Bank) on Friday lowered the seven-day repo rate from 1.7% to 1.5% and reduced the reserve requirement ratio (RRR) amount by 50 basis points.
- Friday's release of the U.S. Consumer Expenditure Price Index could provide some stimulus to the metal, which remains on track for its third consecutive week of gains.
Technical Outlook: Gold Prices May Attract Dish Buying Near the $2,625 Resistance Breakponite
From a technical perspective, the Relative Strength Index (RSI) on the daily chart shows an overbought situation, preventing bulls from placing new bets near XAU/USD. That said, the recent breakout through the short-term uptrend channel suggests that the path of least resistance for gold prices is to the upside. However, bulls will need to wait for short-term consolidation or a modest pullback before taking positions on an extension of the recently established uptrend.
On the other hand, a significant decline could be seen as a buying opportunity near the channel resistance breakpoint, or $2,625. This should help cap the downside for the product near $2,600. The latter should serve as a key pivot point, and a decisive breach of it should pave the way for some meaningful decline in the short term.
Frequently asked questions about risk sentiment
In the world of financial terminology, two terms are widely used: “risk-on” and “risk-off” to refer to the level of risk an investor is willing to accept during a given period of time. In a “risk-on” market, investors are optimistic about the future and are more willing to buy risky assets. In a “risk-off” market, investors begin to “play it safe” out of fear for the future, so they buy low-risk assets that are guaranteed to yield a return, even if it is a relatively small amount.
Typically, during “risk-on” periods, the stock market rises, and so do the values of most commodities, except gold. This is to benefit from positive growth prospects. The currency of a country that is a large exporter of primary products will appreciate due to increased demand, and the virtual currency will appreciate. In a “risk-off” market, bonds, especially major government bonds, rise, gold shines, and safe-haven currencies such as the Japanese yen, Swiss franc, and US dollar all profit.
Minor currencies such as the Australian dollar (AUD), Canadian dollar (CAD), New Zealand dollar (NZD), ruble (RUB) and South African rand (ZAR) all tend to rise in “riskier” markets. This is because the economies of these currencies rely heavily on commodity exports for growth, and commodity prices tend to rise during risk-on periods. High economic activity This is because investors are anticipating an increase in demand for raw materials in the future.
The major currencies that tend to appreciate during “risk-off” periods are the US dollar (USD), the Japanese yen (JPY), and the Swiss franc (CHF). The U.S. dollar is the world's reserve currency, because investors buy U.S. government bonds in times of crisis, and is considered safe because the world's largest economy is unlikely to default. The yen is due to increased demand for Japanese government bonds, and since a high percentage of the value is held by domestic investors, there is little chance of a fire sale of government bonds even in times of crisis. The Swiss Franc is a popular choice because Switzerland's strict banking laws provide investors with greater capital protection.
