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Gold price corrects further from the record high amid some follow-through USD buying.
September Fed rate cut bets should cap the USD and help limit losses for the XAU/USD.
The technical setup supports prospects for the emergence of dip-buying near $2,400.
Gold price (XAU/USD) extends losses in the European session on Friday, currently placed near a multi-day low, around the $2,420 region. The US Dollar (USD) builds on the previous day’s solid recovery from a four-month low and turns out to be a key factor dragging the commodity lower for the third successive day. Apart from this, some profit-taking, especially after the recent rally of over 6.5% since the beginning of this month, further contributes to the decline, though the downside seems limited.
Investors now seem convinced that the Federal Reserve (Fed) will start lowering borrowing costs in September and have been pricing in the possibility of two more rate cuts by year end. This keeps the US Treasury bond yields on the defensive and should cap the USD. Apart from this, the risk-off mood could lend support to the safe-haven Gold price. Furthermore, geopolitical tensions and central bank demand should help limit any meaningful depreciating move for the non-yielding yellow metal.
Daily Digest Market Movers: Gold price extends decline amid a further USD recovery
The US Dollar builds on the previous day’s strong recovery from its lowest level since March 21 and drags the Gold price lower for the third successive day on Friday.
The US Bureau of Labor Statistics (BLS) reported on Thursday that the number of Americans filing for unemployment benefits in the week ending July 13 rose to 243K.
Additional details of the report revealed that the 4-week moving average swelled to the highest level in more than 2-1/2 years, pointing to a loosening labor market.
This, along with ebbing inflation, paves the way for an imminent start of the Federal Reserve’s rate-cutting cycle, offsetting the upbeat US manufacturing data.
In fact, the Philadelphia Fed Manufacturing Index remained in positive territory for a sixth straight month and rose to 13.9 from 1.3 in the previous month.
Nevertheless, the CME Group’s FedWatch Tool indicates that markets are pricing in a 100% chance of a rate-cut in September and an additional two cuts by year-end.
Meanwhile, former President Donald Trump said that Taiwan should pay the US for defense, raising doubts over the US commitment to defend Taiwan in the event of an attack by China.
This comes on top of geopolitical tensions stemming from conflicts in the Middle East and the protracted Russia-Ukraine war, which should lend support to the XAU/USD.
Technical Analysis: Gold price could accelerate the fall once $2,390-2,385 support is broken
From a technical perspective, any subsequent fall is likely to find decent support near the $2,413-2,412 area ahead of the $2,400 round-figure mark. This is followed by the $2,390-2,385 horizontal resistance breakpoint, now turned support, which, if broken decisively, might prompt some technical selling. The Gold price might then accelerate the downfall toward testing the 50-day Simple Moving Average (SMA) support, currently pegged near the $2,359-2,358 region. Sustained weakness below the latter could expose the 100-day SMA near the $2,311 zone, with some intermediate support near the $2,330-2,328 region.
On the flip side, the Asian session high, around the $2,445 area, now seems to act as an immediate hurdle, above which the Gold price could climb to the $2,469-2,470 region. Given that oscillators on the daily chart are still holding comfortably in positive territory, bulls might then aim to retest the all-time peak, near the $2,483-2,484 region, and conquer the $2,500 psychological mark.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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