- Gold price edges lower as USD benefits from reduced expectations of a 50 bps Fed rate cut.
- The downside remains limited as traders look to US inflation numbers for a fresh impetus.
- The technical setup supports prospects for a breakout through a short-term trading range.
Gold price (XAU/USD) remains depressed heading into the European session on Tuesday, albeit manages to hold above the $2,500 psychological mark and the overnight swing low. The US Dollar (USD) gains some positive traction for the third straight day and climbs back closer to the monthly peak touched last week amid reduced bets for a larger 50 basis points (bps) interest rate cut by the Federal Reserve (Fed) in September. This, along with a generally positive tone around the equity markets, is seen undermining demand for the safe-haven precious metal.
Any meaningful depreciating move for the Gold price, however, seems elusive amid the prospects for an imminent start of the Fed’s policy-easing cycle. Traders might also prefer to wait for more cues about the Fed’s rate-cut path before placing fresh directional bets around the non-yielding yellow metal. Hence, the focus remains glued to the crucial US consumer inflation figures and the Producer Price Index (PPI), due for release on Wednesday and Thursday. The data will influence the near-term USD price dynamics and provide some meaningful impetus to the XAU/USD.
Daily Digest Market Movers: Gold price awaits US inflation data before the next leg of a directional move
- Friday’s mixed US employment data reduced the likelihood of a 50-basis point rate cut by the Federal Reserve and continues to benefit the US Dollar, acting as a headwind for the Gold price.
- According to the CME Group’s FedWatch tool, traders see a 71% chance of a 25-basis-points rate cut at the next FOMC meeting on September 17-18 and a 29% chance of a 50-bp reduction.
- Investors opt to wait for the release of the August US consumer price data on Wednesday, which, along with the Producer Price Index on Thursday, could influence Fed rate cut expectations.
- New York Fed President John Williams said on Friday that inflation expectations remain well anchored and that monetary policy can be moved to a more neutral stance depending on data.
- Separately, Fed Governor Christopher Waller noted that maintaining the economy’s forward momentum means the time has come to begin reducing rates and that he is open-minded on the size.
- Adding to this, Chicago Fed President Austan Goolsbee said that officials are finally beginning to catch up with the broader market’s view that the time has come for a move on policy rates.
- This suggests that the path of least resistance for the non-yielding XAU/USD remains to the upside and the immediate market reaction to stronger US inflation numbers is more likely to be limited.
- Official data published this Tuesday showed that China’s trade surplus widened from CNY601.98 billion to CNY649.34 billion in August, led by an 8.4% jump in exports and weak import figures.
Technical Outlook: Gold price extends the range play in a multi-week trading range, bullish bias remains
From a technical perspective, the range-bound price action witnessed over the past three weeks or so constitutes the formation of a rectangle on the daily chart. Against the backdrop of the recent rally to the all-time peak, this might still be categorized as a bullish consolidation phase. Moreover, oscillators on the daily chart are holding in the positive territory, validating the near-term positive outlook for the Gold price. That said, it will still be prudent to wait for a sustained breakout through the trading range resistance, or the all-time peak around the $2.530-2,532 region, before positioning for any further appreciating move.
On the flip side, any meaningful slide is likely to find some support near the $2,485 area ahead of the $2,470 horizontal zone. The latter represents the lower boundary of the aforementioned trading range, which if broken decisively might prompt some technical selling and pave the way for deeper losses. The Gold price might then accelerate the fall towards the 50-day Simple Moving Average (SMA) support, currently pegged near the $2,446 area, before eventually dropping to the $2,410-2,400 region.
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.
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