News & Analyses

Gold falls on soft US Dollar, lower US Treasury yields

  • Gold stabilizes at $2,305, down 0.60% amid positive sentiment, lower US Treasury yields, softer USD.
  • Fed holds fed funds rate, tweaks to QT program influence market dynamics.
  • Chair Powell urges caution on rate changes pending clearer inflation progress.

Gold price clings to the $2,300 figure in the mid-North American session on Thursday amid an upbeat market sentiment, falling US Treasury yields, and a softer US Dollar. Traders are still digesting Wednesday’s comments of the Federal Reserve’s Chairman, Jerome Powell, and the US central bank’s decision to hold rates unchanged. Meanwhile, data showed the US trade deficit narrowed a tick, and the labor market is still tight.

The XAU/USD trades at $2,305, down by 0.60%. Market participants expected a more hawkish tilt by the Fed, which remained neutral. The central bank delivered a neutral monetary policy statement and announced that it would reduce the pace of its Quantitative Tightening (QT) program.

During his press conference, Fed Chair Jerome Powell said it wouldn’t be appropriate to cut rates until they have confidence that inflation is trending toward its 2% goal, adding that this year’s inflation data “has not given us that greater confidence.” They would decide monetary policy “meeting by meeting,” while adding that slowing the pace of balance sheet runoff “will ensure a smooth transition for money markets.”

He added the Fed’s belief that monetary policy is sufficiently restrictive to curb inflation and disregarded the potential of hiking rates when asked.

On Wednesday, the Federal Reserve opted to maintain the federal funds rate at 5.25%- 5.50%. In their statement, they noted that the risks associated with achieving the Fed’s dual mandate, which focuses on employment and inflation, have become more balanced over the past year. Despite acknowledging progress on inflation, they also recognized that recent data suggest this progress has stalled.

Daily digest market movers: Gold price stays firm amid steady US Dollar, falling US yields

  • Gold prices remain underpinned by lower US Treasury yields and a softer US Dollar. The US 10-year Treasury note is yielding 4.579%, down five basis points (bps) from its opening level. The US Dollar Index (DXY), which tracks the Greenback’s performance against six other currencies, edged down 0.23% and is at 105.39.
  • The US Trade Balance data revealed a slight narrowing of the deficit by -0.1%, moving from $69.5 billion to $69.4 billion, which fell short of the expected $69.1 billion. This change was due to a -1.6% decrease in imports, which totaled $327 billion, and a -2.0% decline in exports, which dropped to $257.6 billion.
  • Additionally, the US Bureau of Labor Statistics (BLS) reported that US Initial Jobless Claims for the week ending April 27 remained steady at 208K, unchanged from the previous week and lower than the anticipated 212K.
  • On Wednesday, the Fed decided to keep the fed funds rate unchanged at 5.25%-5.50 %. They acknowledged that risks to achieving the Fed’s dual mandate on employment and inflation “moved toward better balance over the past year.” Although they said there’s progress on inflation, recent data showed that it has stalled.
  • Fed policymakers added that they would begin reducing their balance sheet holdings of US Treasury securities from $60 billion to $25 billion starting in June.
  • On May 3, the US Bureau of Labor Statistics (BLS) is expected to reveal April’s Nonfarm Payrolls figures, which are expected to come at 243K, below March’s 303K. The Unemployment Rate is estimated to stay at 3.8%, while Average Hourly Earnings would likely remain unchanged at 0.3% MoM.
  • Data from the Chicago Board of Trade (CBOT) suggests that traders expect the fed funds rate to finish 2024 at 5.045%, down from 5.100% on Wednesday.

Technical analysis: Gold price drops but stays above $2,300

Gold’s uptrend remains in place, though buyers had failed to push prices past the April 26 high of $2,352, which could open the door to challenging $2,400. Further upside is seen at the April 19 high at $2,417 and the all-time high of $2,431.

Momentum favors XAU/USD’s bulls, according to the Relative Strength Index (RSI). Despite trending lower, the RSI remains above the 50-midline, suggesting that buyers are in control.

On the flip side, a bearish continuation looms if Gold sellers drive prices below $2,300, exacerbating a pullback toward the April 23 daily low of $2,291. Subsequent losses are expected, beneath the March 21 daily high, which turned support at $2,223, followed by $2,200.

Inflation FAQs

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.


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