- Gold attracts some buyers for the second straight day amid dovish Fed expectations.
- The US CPI lifts September Fed rate cut bets, weighing on USD and lending support.
- The upbeat market mood might cap any further gains for the safe-haven commodity.
Gold (XAU/USD) attracts some buyers for the second straight day on Wednesday and looks to build on the previous day’s bounce from the $3,331 area, or a one-and-a-half-week low. The broadly in-line July US consumer inflation figures released on Tuesday reinforced bets that the Federal Reserve (Fed) will lower borrowing costs at the upcoming monetary policy meeting in September. This keeps the US Dollar (USD) on the defensive near its lowest level in more than two weeks and benefits the non-yielding yellow metal.
The intraday uptick, however, lacks bullish conviction in the wake of the underlying bullish sentiment, bolstered by an extension of the US-China trade truce and the US-Russia summit aimed at ending the war in Ukraine, which tends to undermine the safe-haven Gold. This, in turn, makes it prudent to wait for strong follow-through buying before positioning for a further appreciating move for the XAU/USD pair. Traders now look to speeches from FOMC members for short-term opportunities later during the North American session.
Daily Digest Market Movers: Gold attracts some buyers as Fed rate cut bets undermine USD
- The US Bureau of Labor Statistics reported on Tuesday that the headline Consumer Price Index (CPI) remained unchanged at 2.7% on a yearly basis in July. However, the core gauge, which excludes food and energy prices, came in above market estimates and increased to the 3.1% YoY rate from the 2.9% in June.
- On a monthly basis, the CPI and the core CPI rose by 0.2% and 0.3%, respectively, matching expectations. Nevertheless, the data alleviated concerns that trade-related costs might contribute to broader price pressures and keep a September rate cut by the Federal Reserve on the table, amid signs of labor market weakness.
- Moreover, CME Group’s FedWatch Tool indicates that traders are pricing in the possibility that the US central bank will lower borrowing costs at least twice by the year-end. This keeps the US Dollar depressed near the post-US CPI swing low and acts as a tailwind for the non-yielding Gold on Wednesday.
- On the trade-related front, US President Donald Trump signed an executive order on Monday extending a tariff truce with China for another three months. This helped to ease concerns about a trade war between the world’s two largest economies and remains supportive of the upbeat market mood amid hopes that the upcoming US-Russian summit on Friday will increase the chances of ending the prolonged war in Ukraine.
- The S&P 500 and the Nasdaq posted record closing highs on Tuesday, while Japan’s Nikkei 225 reached the 43,000 mark for the first time ever on Wednesday. This is seen undermining traditional safe-haven assets and might hold back the XAU/USD bulls from placing aggressive bets. In the absence of any relevant market-moving macro data from the US, traders will take cues from Fed speakers to grab short-term opportunities.
- The market attention will then shift to the release of the US Producer Price Index (PPI) on Thursday and the Preliminary University of Michigan US Consumer Sentiment Index on Friday. Nevertheless, the mixed fundamental backdrop warrants some caution before positioning for any further appreciating move.
Gold price could accelerate the positive move once the $3,358-3,360 immediate hurdle is cleared
From a technical perspective, the XAU/USD pair, barring the previous day’s knee-jerk downward spike, has been oscillating in a familiar band since the early part of this week. The range-bound price action might still be categorized as a bearish consolidation phase against the backdrop of the recent sharp retracement slide from levels just above the $3,400 mark. Moreover, negative oscillators on hourly/daily charts suggest that the path of least resistance for the Gold is to the downside. That said, it will still be prudent to wait for acceptance below the $3,243-3,242 region (200-period SMA on H4) before positioning for a fall to the $3,300 round figure.
On the flip side, the $3,358-3,360 supply zone now seems to have emerged as an immediate strong barrier. A sustained move beyond has the potential to lift the XAU/USD pair to the $3,380 area en route to the $3,400 mark. Some follow-through buying beyond last week’s swing high, around the $3,409-3,410 area, would be seen as a fresh trigger for the Gold bulls and pave the way for a move towards the next relevant hurdle near the $3,422-3,423 area. The momentum could extend further towards the $3,434-3,435 horizontal resistance, above which the commodity might aim towards challenging the all-time peak, around the $3,500 psychological mark touched in April.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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