- Gold price struggles to capitalize on Monday’s gains amid some follow-through USD buying.
- Rising bets for a September Fed rate cut should limit the downside for the XAU/USD.
- Fed Chair Powell’s speech eyed for some impetus ahead of FOMC minutes on Wednesday.
Gold price (XAU/USD) attracted some dip-buyers near the $2,319-2,318 region and ended in the green at the start of a new week amid bets for a September interest rate cut by the Federal Reserve (Fed). The US ISM PMI showed that the manufacturing sector contracted for the third straight month in June and prices paid by factories for inputs dropped to a six-month low. This further suggested that inflation is subsiding, which should allow the US central bank to start lowering borrowing costs. Apart from this, China’s economic woes, persistent geopolitical tensions, along with political uncertainty in the US and Europe, offered some support to the safe-haven precious metal.
Meanwhile, the US Dollar (USD) builds on the overnight solid bounce from a multi-day low and keeps a lid on any further gains for the Gold price. The yield on the benchmark 10-year government bond shot to its highest level in a month on Monday amid concerns that the imposition of aggressive tariffs by the Trump administration could fuel inflation and trigger higher interest rates. This, in turn, is seen as acting as a tailwind for the USD and capping the upside for non-yielding yellow metal. Moreover, traders prefer to wait for more cues about the Fed’s policy path. Hence, the focus will remain glued to Fed Chair Jerome Powell’s speech later today and the FOMC minutes on Wednesday.
Daily Digest Market Movers: Gold price is undermined by modest USD strength, downside seems cushioned
- Softer US macro data released on Monday reinforced expectations that the Federal Reserve will cut interest rates in September and again in December, prompting some intraday short-covering around the Gold price.
- The Institute for Supply Management (ISM) said its Manufacturing PMI remained in contraction territory for the second straight month and edged lower from 48.7 to 48.5 in June, missing consensus estimates.
- Additional details of the report showed that the Employment Index declined to 49.3 from 51.1 in May and the Prices Paid Index – the inflation component – retreated from 57 to 52.1 during the reported month.
- This comes on top of the US PCE Price Index on Friday, which showed that inflation in May slowed to its lowest annual rate in more than three years and lifted bets for an imminent start of the Fed’s rate-cutting cycle.
- The US Treasuries sold off amid increasing odds of Donald Trump being elected as US President again later this year, which prompted some US Dollar short-covering and capped the upside for the XAU/USD.
- Investors now look forward to Fed Chair Jerome Powell’s speech later this Tuesday for some meaningful impetus ahead of the FOMC minutes on Wednesday and the US Nonfarm Payrolls report on Friday.
- Meanwhile, Tuesday’s US economic docket features the release of JOLTS Job Openings data, which might influence the USD price dynamics and further contribute to producing short-term trading opportunities.
Technical Analysis: Gold price bulls need to wait for sustained move beyond the 50-day SMA barrier
From a technical perspective, the Gold price, so far, has been struggling to make it through the 50-day Simple Moving Average (SMA) pivotal resistance. The said barrier is currently pegged near the $2,337-2,338 region and should act as a key pivotal point. A sustained strength beyond should pave the way for a move towards the next relevant hurdle near the $2,360-2,365 supply zone. Some follow-through buying should allow bulls to reclaim the $2,400 round-figure mark and aim towards challenging the all-time peak, around the $2,450 area touched in May.
On the flip side, weakness below the $2,319-2,318 area, or the overnight swing low, could find some support near the $2,300 mark ahead of the $2,285 horizontal zone. Failure to defend the said support levels will be seen as a fresh trigger for bearish traders and drag the Gold price to the 100-day SMA, currently near the $2,258 area. The downward trajectory could eventually drag the XAU/USD to the $2,225-2,220 region en route to the $2,200 round-figure 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.
