- The price of gold caught fresh bids on Tuesday as dovish Fed expectations continue to weigh on the USD.
- The positive sentiment in the market also does not prevent a positive move back closer to the two-week high.
- Investors are now looking to key minutes from the FOMC meeting for future policy action and fresh impetus.
The price of gold (XAU/USD) is building on an overnight bounce from the $1,966-1,965 area and gaining strong positive traction during Tuesday’s Asian session. Recent data from United States (US) pointed to a slowing labor market and an easing of inflationary pressures, fueling speculation that the Federal Reserve (Fed) may start easing its monetary policy earlier than expected. That is bolstered by a further decline in US Treasury yields, dragging the US dollar (USD) to its lowest level since August 31 and lifting the unyielding yellow metal back closer to the two-week high reached last Friday.
Meanwhile, the strong intraday move up seems rather unaffected by the generally positive risk tone that tends to undercut the safe-haven gold price. China’s promise of additional government stimulus measures boosted investor confidence and continues to support bullish sentiment in the market, although the bearish USD continues to act as a tailwind for the precious metal. However, it remains to be seen whether XAU/USD is able to capitalize on the momentum ahead of the release of the FOMC meeting minutes amid uncertainty over the timing of when Fed they begin to lower interest rates.
Daily Digest Market Movers: Gold price bounces back closer to two-week high hit last Friday on sustained USD selling
- The sell-off in the US dollar remains unabated on dovish expectations of the Federal Reserve and helped the price of gold regain strong positive traction on Tuesday.
- Investors are now confident that the Fed has completed its rate hike cycle and are looking for clues as to when the central bank might start easing its monetary policy.
- The rate-sensitive 2-year U.S. government bond yield remains below the Fed’s current funds target of 5.25% to 5.50%, suggesting momentum in favor of rate cuts is building.
- CME’s Fedwatch tool points to a roughly 30% chance the Fed will start cutting rates as early as March 2024, and a cumulative easing of nearly 100 bps through the end of the year.
- The benchmark US 10-year Treasury yield fell to a fresh two-month low and undercut the USD, offsetting upbeat market sentiment and benefiting from the unyielding yellow metal.
- Investors grew upbeat after Chinese officials promised to introduce more policy support for the country’s beleaguered real estate sector and foster stronger growth momentum.
- China’s new finance minister, Lan Fo’an, said the country would increase budget spending to support a post-pandemic recovery in the world’s second-largest economy.
- Fed officials, meanwhile, did not rule out the possibility that another rate hike might be needed if a change in economic data warranted it.
- Richmond Fed President Thomas Barkin said on Monday that inflation is likely to remain stubborn and force the central bank to keep rates higher for longer than investors currently expect.
- This, in turn, could act as a headwind for the precious metal as traders look to the FOMC minutes for fresh cues on future Fed policy and some meaningful momentum.
Technical analysis: Gold price could return to retest the multi-month high around $2.009-$2.010 touched by the region in October
Technically, some follow-up buying behind last week’s high around the $1,993 area should allow the gold price to regain the $2,000 psychological barrier. The momentum could extend further towards a retest of the multi-month high, around the $2,009-2,010 area touched in October. Sustained strength above the latter will be seen as a new trigger for bearish traders, setting the stage for an extension of the recent good bounce from levels just below the 200-day simple moving average (SMA).
On the downside, the $1,978-1,977 region now appears to be protecting the immediate downside from the overnight swing low around the $1,965 zone. A failure to defend the mentioned support levels could leave the gold price vulnerable and accelerate the decline back towards challenging the 200-day SMA, which is currently near the $1,938-1,937 zone. This is followed by the confluence of the 100- and 50-day SMAs around the $1,930-1,929 area, which, if decisively broken, will shift the short-term bias in favor of bearish traders and trigger some technical selling.
The price of the US dollar this week
The table below shows the percentage change of the US dollar (USD) against the major listed currencies for the week. The US dollar was strongest against the Canadian dollar.
The heat map shows the percentage changes of major currencies against each other. The base currency is selected from the left column, while the quote currency is selected from the top row. For example, if you select the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change shown in the box will be EUR (base)/JPY (rate).
Frequently Asked Questions About Gold
Gold has played a key role in human history as it has been widely used as a store of value and a medium of exchange. Nowadays, the precious metal, apart from its luster and use for jewelry, is widely seen as a safe haven, meaning it is considered a good investment in turbulent times. Gold is also widely seen as a hedge against inflation and currency depreciation because it does not rely on any particular issuer or government.
Central banks are the largest holders of gold. 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 currency. High gold reserves can be a source of confidence for a country’s solvency. Central banks added 1,136 tons of gold to their reserves in 2022, worth about $70 billion, according to data from the World Gold Council. This is the highest annual purchase since records began. Central banks from emerging economies such as China, India and Turkey are rapidly increasing their gold reserves.
Gold has an inverse correlation with the US dollar and US Treasuries, which are both major reserves and safe-haven assets. When the dollar weakens, gold tends to rise, allowing investors and central banks to diversify their assets during turbulent times. Gold is also inversely correlated with risk assets. Stock market rallies tend to weaken the price of gold, while sell-offs in riskier markets tend to favor the precious metal.
The price can fluctuate due to a wide variety of factors. Geopolitical instability or fears of a deep recession can quickly escalate the price of gold due to its safe-haven status. As a lower-yielding asset, gold tends to rise with lower interest rates, while the higher cost of money typically weighs on the yellow metal. Still, most moves depend on how the US dollar (USD) behaves when the asset is priced in dollars (XAU/USD). A strong dollar tends to keep the price of gold in check, while a weaker dollar is likely to push gold prices up.