- Gold price continues to attract buyers amid growing September Fed rate cut bets.
- Tuesday’s upbeat US Retail Sales data underpins the USD and caps the XAU/USD.
- The risk-on mood further warrants caution before positioning for additional gains.
Gold price (XAU/USD) scales higher for the third straight day – also marking the sixth day of a positive move in the previous seven – and hits a fresh record peak, around the $2,482-2,483 region during the Asian session on Wednesday. The current market pricing indicates over a 90% chance that the Federal Reserve (Fed) will cut interest rates in September. This, in turn, keeps the US Treasury bond yields depressed near a multi-month trough and is seen as a key factor driving flows towards the non-yielding yellow metal.
That said, a modest US Dollar (USD) uptick holds back bullish traders from placing fresh bets around the Gold price amid slightly overbought Relative Strength Index (RSI) on the daily chart. Apart from this, the prevalent risk-on environment – as depicted by an extension of the uptrend across the global equity markets – contribute to capping gains for the safe-haven precious metal. Nevertheless, the aforementioned fundamental backdrop suggests that the path of least resistance for the XAU/USD remains to the upside.
Daily Digest Market Movers: Gold price is underpinned by Fed rate cut bets; modest USD uptick caps gains
- The recent comments by Federal Reserve officials reaffirmed expectations of an interest rate cut in September, which continues to drive flows toward the non-yielding Gold price.
- Fed Chair Jerome Powell said on Monday that inflation readings during the second quarter showed more progress was being made on bringing the pace of price increases to the target.
- San Francisco Fed President Mary Daly showed growing confidence that inflation is heading toward the central bank’s goal and added that she expects a policy adjustment at some point.
- Fed Governor Adriana Kugler noted on Tuesday that downside risks to employment have become more balanced, and continued labor market rebalancing suggests inflation will move toward the target.
- Kugler further added that it would be appropriate to begin easing monetary policy later this year if economic conditions continue to evolve favorably and if the labor market cools too much.
- Traders are now pricing in multiple rate cuts by year-end, dragging the yield on the benchmark 10-year US government bond and the rate-sensitive 2-year Treasury yield to a multi-month low.
- Meanwhile, the US Dollar draws support from Tuesday’s upbeat US Retail Sales data, which pointed to consumer resilience and bolstered economic growth prospects for the second quarter.
- The Census Bureau reported Retail Sales in the US remained unchanged in June and the previous month’s revised higher to show a growth of 0.3% as compared to the 0.1% reported originally.
- This, along with an extension of a bullish run across the global equity markets, might hold back traders from placing fresh bullish bets around the safe-haven XAU/USD and cap gains.
Technical Analysis: Gold price needs to consolidate before the next leg up amid slightly overbought RSI
From a technical perspective, the overnight sustained breakout through the $2,425-2,430 supply zone and a subsequent move beyond the $2,450 area, or the previous all-time peak, could be seen as a fresh trigger for bullish traders. That said, oscillators on the daily chart have just started moving in overbought territory and warrant some caution before positioning for additional gains. Hence, any further move-up is more likely to face some resistance and pause near the $2,500 psychological mark.
On the flip side, any meaningful slide below the $2,450 area might now be seen as a buying opportunity and remain limited near the $2,430-2,425 resistance breakpoint, now turned support. A convincing break below the latter, however, might prompt some technical selling and drag the Gold price to the $2,400 mark. Some follow-through selling below the $2,390 area could pave the way for deeper losses toward testing the next relevant support near the $2,360 region.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
