- Gold price drops to over a one-week low and seems vulnerable to extending its descending trend.
- The Fed’s hawkish outlook pushes the US bond yields higher and exerts pressure on Gold price.
- The US Dollar sits near the YTD peak and is seen as another factor undermining the XAU/USD.
Gold price (XAU/USD) extends last week’s rejection slide from the 100-day Simple Moving Average (SMA) and drifts lower for the second successive day on Tuesday, also marking the fifth day of a negative move in the previous six. The US Dollar (USD) buying remains unabated in the wake of a further rise in the US Treasury bond yields, which, in turn, is seen as a key factor undermining demand for the non-yielding yellow metal. The USD Index (DXY), which tracks the Greenback against a basket of currencies, advances to a new 10-month high, while the yield on the benchmark 10-year US government bond scale a fresh 16-year peak in the wake of the Federal Reserve’s (Fed) hawkish outlook.
In fact, the Fed warned last week that still-sticky inflation in the United States (US) was likely to attract at least one more interest rate hike by the end of this year. Moreover, a majority of Fed policymakers now see only two rate cuts in 2024 as compared to four projected previously. Adding to this, the incoming resilient US macro data supports prospects for further policy tightening by the Fed. The bets were further reinforced by Minneapolis Fed President Neel Kashkari’s hawkish remarks, saying that borrowing rates probably needed to be raised further and kept high for some time to bring inflation back down to the 2% target. That said, the risk-off impulse helps limit deeper losses for the safe-haven Gold price.
Expectations that the Fed will keep rates higher for longer revive fears about economic headwinds stemming from rapidly rising borrowing costs. This, along with persistent worries about a housing market crisis in China, continues to weigh on investors’ sentiment. This is evident from a generally weaker tone around the equity markets and lends support to the XAU/USD. The aforementioned fundamental backdrop, however, seems tilted firmly in favour of bearish traders and suggests that the path of least resistance for the Gold price is to the downside.
Daily Digest Market Movers: Gold price seems vulnerable amid hawkish Fed expectations
- Gold price slides to over a one-week low in the wake of rising bets for further policy tightening by the Fed.
- Comments by influential FOMC members back the case for one more 25 basis points (bps) lift-off in 2023.
- The US economic resilience should allow the Fed to stick to its hawkish stance and continue raising rates.
- The benchmark 10-year US Treasury yield touches a fresh 16-year top and the US Dollar hits a 10-month top.
- Surging bond yields and a stronger USD support prospects for a further depreciating move for the yellow metal.
- The risk-off impulse could lend some support to the safe-haven XAU/USD and help limit any further losses.
Technical Analysis: Gold price is likely to retest monthly low around $1,900 mark
Gold price faced rejection near the very important 200-day Simple Moving Average (SMA) on Monday and the subsequent downfall favours bearish traders. Moreover, oscillators on the daily chart have just started gaining negative traction and suggest that the path of least resistance for the XAU/USD is to the downside. Hence, some follow-through weakness back towards retesting the monthly swing low, around the $1,900 round figure, looks like a distinct possibility. Some follow-through selling will be seen as a fresh trigger for bearish traders and pave the way for a further near-term depreciating move.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.