- Gold recovers from recent losses, buoyed by market interest despite a stronger US Dollar and higher US Treasury yields.
- De-escalation of Middle East tensions contributed to increased market stability, denting the appetite for Gold buying.
- US Durable Goods Orders were solid, but expectations for Fed rate cuts shift to later in the year.
Gold recovered some ground on Wednesday after posting back-to-back negative sessions during the beginning of the week as geopolitical risks abated. Better-than-expected economic data from the United States (US), a strong US Dollar, and higher US Treasury yields were not an excuse for golden metal buyers, who stepped in to buy the latest dip.
XAU/USD trades at $2,327 and has gained 0.28%. The Middle East conflict seems to have de-escalated following the fire’s interchange between Iran and Israel. Expectations for a Federal Reserve (Fed) rate cut in June and July vanished as most market participants speculate that the fed funds rate will be lowered for the first time in September 2024.
The US Department of Commerce showed that March’s Durable Goods Orders rose above estimates and February’s numbers, while core sales missed projections but showed an improvement compared to the previous month.
Daily digest market movers: Gold trims its losses amid upbeat Durable Goods Orders report
- US Durable Goods Orders significantly increased in March, expanding by 2.6% MoM, up from a 0.7% rise previously and surpassing 2.5%. When excluding transportation, Durable Goods Orders rose by 0.2% MoM, which was an improvement over February’s 0.1% increase but fell short of the 0.3% projected.
- Upcoming Q1 GDP data, core PCE inflation figures will offer additional insights into potential timing of Fed’s interest rate reductions. The Fed’s preferred inflation gauge, the core Personal Consumption Expenditures (PCE) Price Index, is estimated to remain steadily at 0.3%. The annual core PCE rate is expected to ease to 2.6%, down from February’s rate of 2.8%, indicating potential softening of inflation pressure.
- Tuesday’s softer-than-expected S&P Global PMI report in the US increased odds for July rate cut. Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, wrote: “The US economic upturn lost momentum at the start of the second quarter, with the flash PMI survey respondents reporting below-trend business activity growth in April.” This could help to bring down stubbornly sticky inflation, which remains well above the Fed’s 2% core target.
- Data from the Chicago Board of Trade (CBOT) suggests that traders expect the fed funds rate to finish 2024 at 4.98%, up from 4.965% on Tuesday.
- US 10-year Treasury benchmark rate climbs six basis points (bps) at 4.66%.
- US Dollar Index (DXY) is up 0.18% to 105.87.
Technical Analysis: Gold price stays firm near $2,320
Gold recovered some ground despite forming a “bearish engulfing” chart pattern, which opened the door for a pullback. Although buyers have the upper hand on Wednesday, they are not out of the woods yet. They must push Gold’s spot price above the April 19 low of $2,373, so they can remain hopeful of testing $2,400. Once achieved, the next stop would be Friday’s high of $2,417, followed by the all-time high of $2,431.
On the flip side, if XAU/USD prices dip below the April 15 daily low of $2,324, that would pave the way to test $2,300. A breach of the latter will expose the March 21 high at $2,222.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
