Gold price continues consolidation as investors await fresh cues about BRICS' gold-backed currency

  • Gold price has turned sideways around $1,980.00 as investors are awaiting a fresh trigger.
  • The US Dollar Index sustains confidently above 100.00 despite an absence of supportive fundamentals.
  • US Retail Sales for June showed a slowdown in consumer spending momentum.

Gold price (XAU/USD) is demonstrating a non-directional performance on Wednesday after printing a fresh seven-month high above $1,980.00. The precious metal witnessed immense strength on Tuesday after US Retail Sales for June showed that consumer spending momentum has slowed down but is still sufficient to push the Federal Reserve (Fed) to raise interest rates further at its July 26 FOMC meeting.

Inflationary pressures in the United States are slowing down as the recruitment process by firms is increasing at a snail’s pace. US firms are facing the wrath of higher interest rates by the Fed and tight credit conditions by regional banks. New filters have been added to the credit distribution process by commercial banks to maintain asset quality in a turbulent environment.

Daily Digest Market Movers: Gold price eyes fresh economic trigger

  • Gold price has remained lackluster around $1,980.00 as monthly Retail Sales data for June remained below expectations.
  • US Retail Sales expanded nominally by 0.2% vs. the estimates of 0.5% and the former release of 0.3%. Also, the economic indicator excluding automobiles landed at 0.2%, lower than the consensus and prior release of 0.3%.
  • Scrutiny of the US Retail Sales report indicates that momentum in consumer spending growth has slowed but is still resilient. Sales at service stations and building home materials remained subdued.
  • US economic indicators for June posted so far convey that inflation has slowed down significantly and that labor market conditions have also eased.
  • In addition to soft inflation and a loosening employment market, weak momentum in consumer spending indicates that overall inflationary pressures are lessening.
  • Apart from soft inflationary pressures in the US economy, price pressures in the Eurozone and the United Kingdom are also losing persistence.
  • In spite of softening inflationary pressures, the Federal Reserve is expected to resume its policy-tightening spell next week.
  • Investors should note that Fed chair Jerome Powell skipped hiking interest rates in June after a 13-month long rate-hiking spree.
  • US Treasury Secretary Janet Yellen said on Tuesday that a fading recruitment process by firms is prompting the disinflationary process.
  • Investors anticipate that the Fed would manage to announce victory over sticky inflation without pushing economy into a recession.
  • As per the CME Group’s FedWatch tool, only one more interest rate hike will be announced from the Fed by year-end.
  • Contrary to market expectations, the Fed is consistently reiterating that two more interest rate hikes are appropriate.
  • Meanwhile, the impact of the announcement of a new gold-backed currency by the BRICS (Brazil, Russia, India, China, and South Africa) is fading away.
  • The US Dollar Index (DXY) is making efforts for stabilization above the psychological support of 100.00 as momentum oscillators have turned oversold.
  • Contrary to the USD index, 10-year US Treasury yields have dropped further to near 3.75% amid an upbeat market mood.

Technical Analysis: Gold price plays inside $1,970-1,980

Gold price has turned quiet after printing a fresh seven-week high at $1,984.25 on Tuesday. The precious metal has rebounded after testing the 20-day Exponential Moving Average (EMA) at $1.947.28. Momentum oscillators indicate sheer strength in the upside bias. The yellow metal is approaching the psychological resistance of $2,000.00.

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.

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