Gold price clings to gains despite US Dollar's recovery
- Gold price struggles to hold recovery amid easing Fed rate cut hopes.
- Stubborn US inflation and robust Retail Sales data favour a maintenance of hawkish interest rate stance.
- Market participants will focus on Fed Bostic’s commentary ahead.
Gold price (XAU/USD) is aiming to hold the short-term recovery move in the midst of a persistent downtrend. Gold price printed a fresh monthly low near the psychological support of $2,000 on Wednesday, then bounced.
Yet despite the rebound, the precious metal remains on the backfoot as investors continue to worry about when the Federal Reserve (Fed) will start its long awaited rate-cut cycle. The hopes of an early rate-cut decision from the Fed are easing as the last leg of inflationary pressures in the United States is turning out significantly more stubborn than previously thought, due to robust consumer spending and steady labor market conditions.
Amid an absence of front-line economic indicators, market participants are expected to shift focus towards the first monetary policy meeting of the Fed, which is scheduled for January 31. The Fed is widely anticipated to keep interest rates unchanged in the range of 5.25-5.50%. Investors will keenly focus on how the Fed proposes to make three rate cuts of 25 basis points (bps) each in 2024, as projected in the December monetary policy meeting.
Daily Digest Market Movers: Gold price holds gains despite US Dollar rebounds
- Gold price struggles extend recovery, which was executed after discovering support near the psychological $2,000 level after an intense sell-off.
- The near-term demand is downbeat as uncertainty about an interest rate cut from the Federal Reserve in March has deepened.
- Trades have pared bets supporting a rate cut in March due to resilience in the US economy.
- Bets supporting an interest rate cut of 25-basis points (bps) have increased slightly to 61% but are still below the 75% recorded last week, as per the CME Fedwatch tool.
- Market expectations for early cuts from the Fed have been pushed back as price pressures in the US economy remained stubborn and consumer spending grew strongly in December.
- Upbeat economic indicators have provided room to Fed policymakers to maintain a restrictive monetary policy stance for a longer period than that anticipated by market participants before their release.
- This week, Fed Governor Christopher Waller said the central bank should not rush taking interest rates down as more evidence is needed to ensure that price pressures are returning to 2% in a sustainable manner.
- Christopher Waller advised that the Fed should reduce interest rates “carefully and methodically”, considering resilience in the US economy.
- Meanwhile, the US Dollar Index (DXY) has rebounded after a gradual correction to near 103.20, supported by risk-off market sentiment. 10-year US Treasury yields are maintaining a firm-footing above 4%.
- Later the day, investors will focus on the commentary from Federal Reserve of Atlanta Bank President Raphael Bostic.
- Bostic is expected to maintain a hawkish argument considering stubbornly higher price pressures.
- On Monday, Fed’s Bostic commented that progress in inflation declining towards 2% could slow if policymakers cut interest rates soon.
- On the economic data front, the US Department of Labor has reported that individuals claiming jobless benefits for the first time dropped significnatly to 187K agianst expectations of 207K and the prior reading of 203K.
Technical Analysis: Gold price aims stability above $2,000
Gold price struggles for a firm-footing near psychological support at $2,000 amid a nominal decline in the US Dollar Index. The near-term demand for the precious metal has turned bearish as it has slipped below the 50-period Exponential Moving Average (EMA), which trades around $2,017. The higher-high-higher-low formation in the Gold price is over and market participants could utilize pullbacks for building fresh shorts.
The 14-period Relative Strength Index (RSI) has dropped to near 40.00. If the RSI fails to sustain above 40.00 levels, a bearish momentum will get triggered.
Gold FAQs
Why do people invest in Gold?
Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.
Who buys the most Gold?
Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.
How is Gold correlated with other assets?
Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.
What does the price of Gold depend on?
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.
Author
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.
