- Gold prices rise in a risk-on atmosphere, ignoring robust US data, while the US dollar hits a 12-month low.
- Powell’s dovish comments keep US Treasury yields stable, put pressure on the US dollar and increase the price of gold.
- The focus shifts to the upcoming PCE and labor market data, which are crucial for the Fed’s decisions; the prospect of a rate cut strengthens gold.
Gold prices rose sharply during Tuesday’s North American session amid a risk-on environment and stable US Treasury yields. Investors ignored better-than-expected economic data from the United States (US), which did not support the already battered greenback. The XAU/USD rate is trading at $2,524, up over 0.20%.
The mood in financial markets has not changed since US Federal Reserve (Fed) Chairman Jerome Powell announced last Friday that the time had come for interest rate cuts. This sent US Treasury yields plummeting and the US dollar falling to a new 12-month low, a level last seen in July 2023, as shown by the US Dollar Index (DXY).
The DXY is at 100.55, losing 0.31 percent, while the yield on the 10-year US benchmark bond remains virtually unchanged at 3.829 percent.
American consumers became slightly more optimistic in August, according to a survey by the US Conference Board (CB). However, traders remain fully focused on Friday’s release of the core personal consumption expenditures (PCE) index, the Fed’s preferred inflation indicator, as well as labor market data and the initial jobless claims report, which will be released on August 29.
This could be a prelude to the upcoming non-farm payrolls report, as the Fed is now concerned about the labor market. The labor market will remain healthy if Americans’ jobless claims come in below estimates. Otherwise, the U.S. dollar could weaken further, which would provide a tailwind for gold prices.
The Chicago Board of Trade (CBOT) December 2024 Fed Funds Future Rates contract suggests investors expect the Fed to cut interest rates by 100 basis points this year, up from 97 on Monday. This means traders are expecting a 50 basis point rate cut at the September meeting, even though the probability of a rate cut of that magnitude is 34.5%, according to the CME FedWatch tool.
Rising tensions in the Middle East have boosted gold prices. The conflict between Israel and Hezbollah escalated over the weekend, and fears that the conflict could escalate would be positive for the gold metal.
Daily overview of market drivers: Gold price rises despite disregard for consumer confidence data
- If US economic data remains weak, the upward trend in gold prices is likely to continue and fuel speculation about a deeper interest rate cut by the Fed.
- The US Conference Board announced that the consumer confidence reading for August was 103.3, up from an upwardly revised reading of 101.9 in July and beating estimates of 100.7.
- Gross domestic product (GDP) figures for the second quarter are expected to improve from 1.4% to 2.8% in the second estimate.
- The Fed’s most popular inflation indicator, the PCE (Personal Consumption Expenditures) price index, will be released on Friday. It is expected to rise to 2.7% year-on-year from 2.6%.
Technical outlook: Gold’s uptrend intact, buyers target USD 2,550
The uptrend in gold prices remains intact, even though price developments over the past few days show that traders are hesitant to position themselves ahead of the release of PCE data.
From a momentum perspective, unlike the XAU/USD price action, the Relative Strength Index (RSI) is failing to break above its recent high, which means that a negative divergence could be looming.
If XAU/USD breaks below the current weekly low of $2,503 and $2,500, it would pave the way for a deeper decline. The next support would be the July 17 high at $2,483, followed by the psychological level of $2,450. Further downside can be expected at the 50-day SMA (simple moving average) at $2,410, ahead of $2,400.
On the other hand, if bullion prices break above the all-time high (ATH) of $2,531, it could allow a rally to $2,550 before reaching the $2,600 mark.
Frequently Asked Questions about the Fed
Monetary policy in the U.S. is determined by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and to promote full employment. Its main tool for achieving these goals is adjusting interest rates. When prices rise too quickly and inflation is above the Fed’s 2% target, it raises interest rates, which increases the cost of borrowing across the economy. This leads to a stronger U.S. dollar (USD) because it makes the U.S. a more attractive place for international investors to park their money. When inflation falls below 2% or the unemployment rate is too high, the Fed can cut interest rates to encourage borrowing, which weighs on the greenback.
The Federal Reserve (Fed) holds eight meetings a year at which the Federal Open Market Committee (FOMC) assesses the economic situation and makes monetary policy decisions. The FOMC is attended by twelve Fed representatives – the seven members of the Board of Governors, the President of the Federal Reserve Bank of New York, and four of the remaining eleven presidents of the regional reserve banks, who serve a rotating one-year term.
In extreme situations, the Federal Reserve may resort to a policy called quantitative easing (QE). QE is the process by which the Fed significantly increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the great financial crisis in 2008. It involves the Fed printing more dollars and using them to buy high-quality bonds from financial institutions. QE usually weakens the U.S. dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the capital from the maturing bonds to buy new bonds. This usually has a positive effect on the value of the U.S. dollar.
