Gold hits fresh low since March as inflation fears lift hawkish rate bets ahead of US CPI
- Gold attracts heavy follow-through selling on Wednesday amid renewed US-Iran tensions.
- Inflation fears fuel bets for more hawkish central banks and undermine the yellow metal.
- The USD bulls seem hesitant ahead of the US CPI report, though it fails to lend any support.
Gold (XAU/USD) attracts heavy follow-through selling on Wednesday and weakens further below the $4,200 mark, hitting a fresh low since March 23 during the Asian session. Renewed hostilities between the US and Iran fuel inflationary concerns and bolster bets for more hawkish central banks, which, in turn, is seen as a key factor driving flows away from the non-yielding yellow metal. Furthermore, the decline could be attributed to technical selling following the recent breakdown below the very important 200-day Simple Moving Average (SMA).
The US launched self-defence strikes against Iran on Tuesday in retaliation for the downing of a US Apache helicopter in the Strait of Hormuz. In response, Iran’s Islamic Revolutionary Guard Corps (IRGC) said it has targeted an airbase in Jordan hosting US forces, as well as Kuwait and Bahrain, and warned of “a more severe response” if the US aggression continues. Furthermore, Iran's Foreign Minister Abbas Araghchi said that the country's armed forces would not leave any attack or threat unanswered and warned the US to leave the region or face consequences. This keeps geopolitical risk premiums in play and helps Crude Oil prices to hold above a two-month low, touched the previous day.
According to the CME Group's FedWatch Tool, traders are assigning nearly a 75% chance that the US Federal Reserve (Fed) will hike interest rates by the end of this year amid concerns about sticky inflation due to elevated energy prices. However, the US Dollar (USD) bulls seem hesitant and opt to wait for the release of the latest US consumer inflation figures before placing fresh bets. The crucial US Consumer Price Index (CPI) report will play a key role in influencing market expectations about the Fed's policy path, which, in turn, should provide some meaningful impetus to the USD. In the meantime, the fundamental backdrop might continue to exert pressure on the Gold price.
XAU/USD daily chart
Gold bears retain control despite slightly oversold daily RSI
From a technical perspective, the latest leg down confirms a fresh breakdown below a downward-sloping channel extending from the April swing high. Moreover, the precious metal remains entrenched below the 200-day Simple Moving Average (SMA), validating the near-term negative outlook and backing the case for further losses.
Moreover, the daily Relative Strength Index (14) near 28 signals oversold conditions, and the Moving Average Convergence Divergence (MACD) indicator deep in negative territory reinforces prevailing bearish momentum. This leaves the Gold price vulnerable to further declines, towards retesting the March swing low, around the $4,100 mark.
On the topside, initial resistance is seen at the former channel floor around $4,238, followed by the 200-day SMA near $4,444. A recovery back above the latter would begin to ease the broader downside pressure implied by the dominant descending channel and lift the Gold price further to the channel top near $4,546 and the prior swing reference around $4,634.
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.
Author
Haresh Menghani
FXStreet
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.
