- Gold price manages to hold above $2,300 and is supported by subdued US Dollar price action.
- A hawkish shift in the Fed’s interest rate projections should act as a headwind for the commodity.
- Signs of easing inflation keep hopes alive for a September rate cut and should act as a tailwind.
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 attracts some dip-buyers during the Asian session on Friday. Any meaningful appreciating move, however, seems elusive amid the Federal Reserve’s (Fed) hawkish surprise on Wednesday. In fact, policymakers, in the so-called “dot plot”, indicated only one interest rate cut in 2024, which might continue to act as a headwind for the non-yielding yellow metal. Apart from this, the underlying bullish sentiment across the global equity markets should contribute to capping gains for the safe-haven metal.
Meanwhile, this week’s softer inflation figures fueled expectations that the Fed could start cutting interest rates as soon as September amid signs of cooling inflationary pressures. This, in turn, fails to assist the US Dollar (USD) to capitalize on its goodish rebound from the weekly low touched on Wednesday and lends some support to the Gold price. Moreover, persistent geopolitical tensions in the Middle East and renewed political uncertainty in Europe should help limit the downside for the XAU/USD. Traders now look to the release of the Preliminary Michigan US Consumer Sentiment Index for short-term opportunities on the last day of the week.
Daily Digest Market Movers: Gold price struggles to attract buyers amid Fed’s hawkish outlook
- 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 bears have the upper hand while below 50-day SMA breakpoint
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.
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.
