Gold price seems vulnerable ahead of US CPI and FOMC decision on Wednesday

June 11, 2024 4:36 am

  • Gold price stalls the previous day’s recovery move from its lowest level in over a month.
  • Reduced bets for a September Fed rate cut underpin the USD and cap the yellow metal.
  • Renewed political uncertainty in Europe and geopolitical risks should limit the downside.
  • Traders also seem hesitant ahead of the US CPI and FOMC decision on Wednesday.

Gold price (XAU/USD) gained some positive traction on the first day of a new week and reversed a part of Friday’s post-NFP slump to the $2,287-2,286 area, or over a one-month low. The uptick, however, remains capped in the wake of a bullish US Dollar (USD), which tends to undermine demand for the USD-denominated commodity. The stronger-than-expected US monthly jobs report released on Friday forced investors to scale back their bets for an imminent interest rate cut by the Federal Reserve (Fed) in September. This keeps the US Treasury bond yields elevated and assists the USD to stand tall near a multi-week high touched on Monday.

Furthermore, the People’s Bank of China (PBoC) reported no change to its gold holdings in May, marking an end to its one-and-a-half-year-long buying spree. This further contributes to keeping a lid on the Gold price, though political uncertainty in Europe should help limit the downside. Traders might also prefer to wait on the sidelines ahead of this week’s release of the latest US consumer inflation figures and the highly-anticipated FOMC monetary policy decision on Wednesday. Investors will look for cues about the likely timing when the Fed will begin cutting rates, which will determine the near-term trajectory for the non-yielding yellow metal. 

Daily Digest Market Movers: Gold price struggles to lure buyers amid hawkish Fed expectations, bullish USD

  • The upbeat US Nonfarm Payrolls released on Friday fueled speculations that the Federal Reserve will keep rates higher for longer and turn out to be a key factor acting as a headwind for the non-yielding Gold price. 
  • The chances of a rate cut in September fell to around 50% following the US jobs data and the markets are now pricing in just one cut of 25 basis points this year, either at the November or December policy meeting.
  • The yield on the benchmark 10-year US government bond holds steady above 4.45%, while the yield on the rate-sensitive two-year US Treasury note remains close to 5.0%, which, in turn, is underpinning the US Dollar.
  • The USD Index, which tracks the Greenback against a basket of currencies, stands tall near its highest level since May 14 set on Monday and contributes to capping the upside for the USD-denominated commodity.
  • French President Emmanuel Macron’s decision to call snap elections later this month increased political uncertainty in the Eurozone’s second-biggest economy and could lend support to the XAU/USD. 
  • Traders also seem reluctant and keenly await this week’s key US macro data – the latest consumer inflation figures – and the crucial FOMC decision on Wednesday before placing aggressive directional bets.

Technical Analysis: Gold price bears have the upper hand below 50-day SMA, $2,285 is a key point of defense

From a technical perspective, Friday’s breakdown below the 50-day Simple Moving Average (SMA) was seen as a fresh trigger for bearish traders against the backdrop of negative oscillators on the daily chart. Some follow-through selling below the $2,285 horizontal support will reaffirm the bearish outlook and drag the Gold price to 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, the $2,325 horizontal zone is likely to act as an immediate strong barrier ahead of the 50-day SMA support breakpoint, currently pegged near the $2,343-2,344 region. This is followed by the $2,360-2,362 supply zone, which if cleared should allow the Gold price to retest last week’s swing high, around the $2,387-2,388 area and reclaim the $2,400 mark. A sustained strength beyond the latter will negate any near-term negative bias and pave the way for a further appreciating move in the near term.

Gold FAQs

Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.

Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.

Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling 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 Gold price, while sell-offs in riskier markets tend to favor the precious metal.

The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.

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