Gold price remains in consolidative mode amid rising Fed rate cut bets

July 4, 2024 7:30 am

  • Gold price remains supported near a two-week high amid rising Fed rate cut bets.
  • Geopolitics, along with political uncertainty, also lends support to the XAU/USD.
  • A positive risk tone could cap further gains ahead of the US NFP report on Friday.

Gold price (XAU/USD) trades with a mild positive bias during the early European trading hours on Thursday, albeit lacks follow-through and remains below a nearly two-week high touched the previous day. The underlying strong bullish sentiment across the global equity markets is seen acting as a headwind for the safe-haven precious metal amid relatively thin liquidity on the back of the Independence Day holiday in the US. Traders also seem reluctant and prefer to wait for the release of the closely-watched US monthly employment details – popularly known as the Nonfarm Payrolls (NFP) report on Friday before positioning for the next leg of a directional move. 

The downside for the Gold price, meanwhile, seems cushioned in the wake of firming expectations that the Federal Reserve (Fed) will start its rate-cutting cycle later this year. The bets were reaffirmed by softer US macro data released on Wednesday that pointed to signs of weakness in the labor market and a softening economy. Moreover, the minutes of the last FOMC meeting revealed that the majority of policymakers said the US economic growth is gradually cooling. This led to the overnight slump in the US Treasury bond yields and dragged the US Dollar (USD) to a three-week low, which might continue to lend support to the non-yielding yellow metal. 

Daily Digest Market Movers: Gold price struggles to gain ground amid a positive risk tone

  • The incoming softer US macro data lifts market bets for an imminent start of the Federal Reserve’s rate-cutting cycle later this year, which continues to act as a tailwind for the non-yielding Gold price.
  • The Automatic Data Processing (ADP) reported on Wednesday that private-sector employment in the US rose 150,000 in June as compared to 157,000 in the previous month and expectations of 160,000.
  • Separately,  the Labor Department said the number of Americans who applied for unemployment benefits rose further to a 2-1/2-year high last week, pointing to signs of easing labor market conditions.
  • Moreover, the Institute for Supply Management’s (ISM) Services PMI dropped in contraction territory and came in at 48.8 for June – marking its lowest level since May 2020 and missing consensus estimates. 
  • The data further pointed to a loss of momentum in the economy at the end of the second quarter, reaffirming expectations that the Fed will lower borrowing costs in September and cut rates again in December. 
  • Meanwhile, the minutes from the June 11-12 FOMC meeting revealed that the vast majority of policymakers assessed that the US economy seemed to be slowing and noted that price pressures were easing.
  • Officials, however, argued that additional favorable data was required to give them greater confidence that inflation was moving sustainably toward the 2% target and before reducing interest rates. 
  • The US Treasury bond yields slumped for the second successive day on Wednesday and wiped out the Donald Trump and French election-fueled spike at the start of the week, undermining the US Dollar. 
  • Investors now look forward to the release of the US Nonfarm Payrolls (NFP) report on Friday for cues about the Fed’s future policy decision, which will determine the near-term trajectory for the XAU/USD. 

Technical Analysis: Gold price technical setup favors bulls and a move towards reclaiming the $2,400 round figure

From a technical perspective, the overnight breakout through the 50-day Simple Moving Average (SMA), along with the fact that oscillators on the daily chart have again started gaining positive traction, favor bullish traders. Some follow-through buying and a sustained strength beyond the $2,365 area will reaffirm the constructive outlook, setting the stage for a move towards reclaiming the $2,400 mark. The Gold price might then extend the positive momentum and aim to challenge the all-time peak, around the $2,450 zone touched in May.

On the flip side, any meaningful pullback now seems to attract fresh buyers near the 50-day SMA resistance breakpoint, around the $2,339-2,338 region. The next relevant support is pegged near the $2,319-2,318 area, which, if broken, could make the Gold price vulnerable to weaken further below the $2,300 mark and test the $2,285 horizontal zone. A convincing break below the latter will be seen as a fresh trigger for bearish traders and expose the 100-day SMA support, currently near the $2,258 area before the metal drops to the $2,225-2,220 region and 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.

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