Gold price manages to hold above $2,300, though struggles to attract any meaningful buyers.
A hawkish shift in the Fed’s interest rate projections acts as a headwind for the XAU/USD.
Signs of easing inflation keep hopes alive for a September rate cut and lend some support.
Gold price (XAU/USD) ended in the red on Thursday for the first time in four days, although it showed some resilience below the $2,300 round-figure mark and held steady above the said hand through the Asian session on Friday. The upside, however, seems limited in the wake of the Federal Reserve’s (Fed) hawkish stance on interest rates. In fact, policymakers forecasted only one interest rate cut in 2024, which, in turn, is seen as a key factor that continues to act as a headwind for the non-yielding yellow metal. Apart from this, a generally positive risk tone and a modest US Dollar (USD) uptick, bolstered by the post-Bank of Japan (BoJ) selling in the Japanese Yen (JPY), contributes to capping gains for the commodity.
Meanwhile, the markets are still pricing in a greater chance that the Fed could begin its rate-cutting cycle as soon as September amid signs of easing inflationary pressures in the US. This, in turn, dragged the US Treasury bond yields to their lowest level since April, which could keep a lid on any meaningful appreciating move for the Greenback and lend some support to the USD-denominated commodity. This, along with persistent geopolitical tensions in the Middle East and renewed political uncertainty in Europe, warrants some caution before placing aggressive bearish bets around the XAU/USD and positioning for an extension of the recent pullback from the all-time peak, around the $2,450 area touched in May.
Daily Digest Market Movers: Gold price lacks firm intraday direction amid mixed fundamental cues
The Federal Reserve projected only one rate cut in 2024 as compared to three cuts estimated at the March meeting, which is seen underpinning the US Dollar and acting as a headwind for the non-yielding Gold price.
This week’s softer inflation figures, however, suggest that the Fed could lower borrowing costs earlier than expected, with the CME Group’s FedWatch Tool indicating a greater chance of the first rate cut in September.
The data published by the US Bureau of Labor Statistics on Thursday showed that the Producer Price Index (PPI) for final demand rose by 2.2% on a yearly basis in May, lower than the 2.3% previous and 2.5% expected.
Adding to this, the annual core PPI rose 2.3% during the reported month, below April’s increase and the market expectation of 2.4%. On a monthly basis, the PPI declined 0.2%, while the core PPI remained unchanged.
This comes on top of Wednesday’s softer CPI report, which showed that consumer prices were unchanged in May for the first time since last June and the yearly rate edged down to 3.3% from the 3.4% recorded in April.
Separately, the US Department of Labor (DoL) reported that the number of Americans who filed for unemployment insurance for the first time increased more than anticipated, to 242K last week from the 229K previous.
Meanwhile, a snap election call in France sparked wider political concerns and should limit losses for the safe-haven XAU/USD against the backdrop of Russia’s ongoing war in Ukraine and conflict in the Middle East.
Investors now look to the Preliminary release of the Michigan US Consumer Sentiment Index, which could influence the USD price dynamics and produce short-term trading opportunities on the last day of the week.
Technical Analysis: Gold price bulls and bears jostle around $2,300, upside potential seems limited
From a technical perspective, the post-FOMC rejection near the 50-day Simple Moving Average (SMA) and negative oscillators on the daily chart favor bearish traders. That said, failure to find acceptance below the $2,300 mark warrants some caution. Hence, it will be prudent to wait for some follow-through selling below the $2,285 horizontal support before positioning for any further losses. The Gold price might then accelerate the fall towards the next relevant support near the $2,254-2,253 region. The downward trajectory could extend further towards the $2,225-2,220 area en route to the $2,200 round figure.
On the flip side, any meaningful recovery is likely to confront resistance near the $2,325 area. This is followed by the 50-day SMA support-turned-resistance, currently pegged near the $2,345 region and the $2,360-2,362 supply zone. A sustained strength beyond the latter should allow the Gold price to retest last week’s swing high, around the $2,387-2,388 area, and aim to reclaim the $2,400 mark. Some follow-through will negate any near-term negative bias and allow the XAU/USD to challenge the all-time peak, around the $2,450 region touched in May.
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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