- Gold prices fell following the release of the crucial US CPI report on Wednesday.
- Fading odds of a 50bp rate cut in September lift US bond yields and the USD.
- The prospects for an imminent start to the Fed’s easing cycle offer some support.
Gold (XAU/USD) price saw an intraday pullback from near the all-time high on Wednesday after the latest US consumer inflation figures dashed hopes of a larger rate cut by the Federal Reserve (Fed) in September. Adding to this, the risk-on momentum further undermined the safe-haven precious metal, which closed in the red for the first time in three days. That said, prospects of an imminent start of the Fed’s easing cycle helped the non-yielding yellow metal find some support and bounce off the psychological $2,500 mark.
Moreover, investors expect the US central bank to cut interest rates by 25 basis points (bps) in each of the three remaining policy meetings in 2024. This, in turn, acts as a tailwind for the gold price during the Asian session on Thursday. However, the upside remains limited amid the emergence of some US Dollar (USD) buying, driven by a pickup in US Treasury bond yields. Moreover, the XAU/USD remains confined in a multi-week trading range, warranting some caution for aggressive traders and positioning for a firm near-term direction.
Daily Market Wrap: Gold price struggles to gain traction as traders reduce bets on aggressive Fed easing
- Gold prices fell on Wednesday after the crucial US Consumer Price Index (CPI) report forced investors to lower their expectations for a larger 50 basis point interest rate cut by the Federal Reserve next week.
- The U.S. Bureau of Labor Statistics reported that headline CPI rose 0.2% in August and the annual rate slowed more than expected, from 2.9% to 2.5%, marking the smallest increase since February 2021.
- Meanwhile, core CPI, which excludes volatile food and energy prices, rose 0.3% in the reported month and increased 3.2% in the 12 months through August, matching July’s increase and market expectations.
- According to the CME Group’s FedWatch tool, markets are currently pricing in an 87% chance of a 25bp rate cut at the next FOMC policy meeting on September 17-18, compared with 71% before the US CPI data.
- Fading odds of more aggressive policy easing by the US central bank are boosting US Treasury bond yields and the US Dollar, which, in turn, is likely to act as a headwind for the non-yielding yellow metal.
- Traders are now looking to the release of the US Producer Price Index (PPI) for some impetus, although market reaction is likely to be limited amid prospects of an imminent start to the Fed’s rate-cutting cycle.
Technical Outlook: Gold price extends consolidation move and remains range-bound for several weeks
From a technical perspective, the recent range-bound price action constitutes the formation of a rectangle on the short-term charts and could still be categorized as a bullish consolidation phase in the context of a rally from the June swing low. Moreover, the mixed oscillators on the daily chart make it prudent to wait for a breakout through the range in the short term before opening fresh directional bets. Meanwhile, any subsequent move higher might continue to face some resistance near the $2,530-$2,532 region, or the all-time high reached in August. Some follow-up buying will be seen as a fresh trigger for bullish traders and pave the way for the resumption of the previous well-established uptrend.
On the other hand, weakness below the $2,500 mark is likely to find support near the $2,485 region before the $2,470 horizontal zone. The latter coincides with the lower boundary of the aforementioned trading range and should act as a strong base for the gold price. A convincing break below it could trigger aggressive technical selling and drag the XAU/USD towards the 50-day simple moving average (SMA), currently located near the $2,453-$2,452 region. The downside correction could extend further towards sub-$2,400 levels, or the 100-day SMA support.
Gold FAQs
Gold has played a pivotal role in human history as it has been widely used as a store of value and a medium of exchange. Today, apart from its luster and use for jewelry, the precious metal is considered a safe haven asset, meaning it is considered a good investment in turbulent times. Gold is also considered a hedge against inflation and currency depreciation as it is not dependent on any particular issuer or government.
Central banks are the largest holders of gold. In order to support their currencies in turbulent times, central banks tend to diversify their reserves and buy gold to improve the perception of the strength of the economy and the currency. High gold reserves can be a source of confidence in a country’s solvency. Central banks added 1,136 tonnes of gold worth about $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the largest annual purchase on record. Central banks in emerging economies such as China, India and Turkey are rapidly increasing their gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasury bonds, which are the main reserve and safe haven assets. When the Dollar depreciates, the price of Gold tends to rise, allowing investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken the price of Gold, while sell-offs in riskier markets tend to favor the precious metal.
Gold prices can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can cause the price of Gold to rise rapidly due to its status as a safe haven asset. As a non-yielding asset, Gold prices tend to rise when interest rates fall, while rising money prices often weigh down the yellow metal. Still, most of the moves depend on how the US Dollar (USD) performs, as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep Gold prices in check, while a weaker Dollar is likely to push Gold prices higher.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
