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Gold price surrenders gains as cautious market mood improves US Dollar appeal

  • Gold price falls back vertically as US Dollar delivers V-shape recovery.
  • A tight US labor market could be a restricting factor for achieving price stability.
  • Fed Powell’s speech at Jackson Hole is the key event this week

Gold price (XAU/USD) faces selling pressure after failing to sustain above the crucial resistance of $1,900.00. The US Dollar recovers strongly as investors hope that higher interest rates by the Federal Reserve (Fed) for a longer period will impact risk-perceived assets. The precious metal recovers as investors seem confident that the Fed is not planning to raise interest rates further but also admit that rate cuts are unlikely to be under discussion this year.

The US economy continues to remain resilient as the country’s labor market is extremely tight. Fed Chair Jerome Powell is likely to provide guidance on interest rates and the economic outlook in his speech at the Jackson Hole Economic Symposium. It will be worth watching whether Jerome Powell mentions the possibility of a recession due to restrictive monetary policy. On the economic data front, Durable Goods Orders data for July will be watched this week.

Daily Digest Market Movers: Gold price faces pressure as US Dollar recovers

  • Gold price extends its recovery to near the crucial resistance of $1,900 as the US Dollar Index (DXY) corrects after failing to climb above the 103.50 hurdle.
  • The precious metal strengthens as investors remain confident about the Fed keeping interest rates unchanged in its September monetary policy.
  • US Treasury Yields struggle to extend upside, providing a level field ahead of the Jackson Hole Economic Symposium.
  • Investors will keenly watch Fed Chair Jerome Powell’s commentary at Jackson Hole. Powell is likely to provide a roadmap over how to shred the ‘last mile’ of inflation and achieve price stability.
  • Market participants are expecting that the commentary from Jerome Powell will not come with a warning of additional interest rate hikes. However, a strong message suggesting the possibility of higher interest rates for a longer period cannot be ruled out.
  • Apart from the interest rate guidance, Powell’s outlook on the labor market and broad economic activity will be keenly watched.
  • Morgan Stanley said a possible shift in thinking on the neutral rate deserves attention because it would imply a shift in the expected path for the policy rate and thereby the yield curve as a whole.
  • Before the Jackson Hole event, investors will focus on the S&P Global PMI and New Home Sales data, which will be published on Wednesday.
  • According to estimates, the Manufacturing PMI is expected to increase to 49.3 in August from 49.0 in July. The Services PMI is seen declining slightly to 52.2 from 52.3a a month earlier.
  • Monthly New Home Sales for July are expected to increase despite higher mortgage rates.
  • A major economic dataset will be US Durable Goods Orders for July, which will be released on Thursday at 12:30 GMT. Orders are expected to contract by a sharp 4.0%. In June, Durable Goods Orders expanded by 4.6%.
  • The market mood turns cheerful despite the fact that Moody’s and S&P Global have downgraded the credit ratings of US commercial banks, citing risks of rising outflows in a high-interest rate environment.
  • The US economy is expected to remain resilient as the labor market is extremely tight and construction spending is increasing despite higher interest rates.
  • Fed policymakers say that the growth rate could slow down for a few quarters amid the agenda of achieving price stability.
  • A survey conducted in July by the National Federation of Independent Business (NFIB) shows small businesses are much less worried about the health of their bank than they were in the immediate aftermath of this spring's bank failures, including that of Silicon Valley Bank.
  • The NFIB survey conducted further shows that 52% of small-business owners say the economy is already in a recession. The percentage is down from the 55% recorded in April.

Technical Analysis: Gold price drops to near $1,890

Gold price delivers a two-day consolidation breakout but fails to maintain strength. The precious metal drops vertically as the US Dollar resumes its upside journey, providing a level field ahead of the Jackson Hole Symposium. The yellow metal rebounds after printing a fresh five-month low of around $1,885.00, but still trades below the 200-day Exponential Moving Average (EMA), which indicates that the long-term trend is bearish.

Interest rates FAQs

What are interest rates?

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.

How do interest rates impact currencies?

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.

How do interest rates influence the price of Gold?

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.

What is the Fed Funds rate?

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

Sagar Dua

Sagar Dua

FXStreet

Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.

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