- Gold price extends a two-day losing spell as investors channel funds into the US Dollar.
- US recession fears recede sharply due to cooling inflationary pressures and stable job growth.
- US ISM Services PMI for August landed at 54.5 vs. expectations of 52.5 and July's reading of 52.7.
Gold price (XAU/USD) extends correction after a speech from Boston Fed President Susan Collins and upbeat US ISM Services PMI for August. Fed Collins cited that this phase of monetary policy calls for patience and policy decisions will be based on incoming data. The ISM reported a sharp increase in service activities to 54.5 vs. expectations of 52.5 and July's reading of 52.7.
The precious metal remains under pressure as investors keep pumping money into the US Dollar due to deepening global recession fears. Investors underpinned the US Dollar as a safe haven as developing economies are facing the wrath of higher interest rates from Western central banks and potential upside risks of deflation to the Chinese economy.
Fundamentally, it doesn’t seem bad for the Gold price as the US Unemployment Rate rose sharply to 3.8% and wage growth slowed in August. Investors hope that the Federal Reserve (Fed) is done with hiking interest rates. Fed Governor Christopher Waller supported the view, citing the latest batch of economic data that has provided more room for the central bank to assess whether the cost of borrowing needs to be increased again.
Daily Digest Market Movers: Gold price drops further as Services PMI remains upbeat
- Gold price resumes its downside journey, and tests territory below the crucial support of $1,920.00 as investors underpin the US Dollar as a safe-haven asset amid deepening global uncertainties and US ISM Services PMI outperformed expectations.
- The ISM agency reported a sharp increase in service activities to 54.5 vs. expectations of 52.5 and July's reading of 52.7.
- The precious metal fails to find attention despite the Federal Reserve being expected to keep interest rates steady at 5.25-5.50% for the remaining year.
- As per the CME Fedwatch Tool, there is a 53% chance that interest rates will remain unchanged at 5.25%-5.50% by year-end.
- Fed Governor Christopher Waller said on Tuesday the latest batch of economic data has provided more room to the central bank to assess whether interest rates need to increase again. Fed Waller further added that he doesn’t see any trigger forcing further policy tightening.
- A higher Unemployment Rate and a slower wage growth rate for August are supportive catalysts that would allow Fed policymakers to deliver an unchanged interest rate decision.
- Contrary to Fed Waller, Cleveland Fed Bank President Loretta Mester said there is still a lot of time before the FOMC decision in late September and the central bank will get a lot of data and information by then.
- The US Dollar hovers near a fresh five-month high, marginally lower than 105.00. The Greenback is walking on thin ice as investors hope that the Fed is done with hiking interest rates further.
- US Factory Orders for July contracted sharply by 2.1% after expanding for four straight months, while investors forecasted 0.1% shrinkage. In June, the economic data expanded significantly by 2.3%.
- New Orders for manufactured goods were contracted due to a sharp decline in demand for durable goods as corporations banked on backlogs amid a weak demand outlook.
- Investors will also focus on commentary from Dallas Fed President Lorie Logan.
- Last week, the US ISM Manufacturing PMI for August remained stabilized but continued to stay below the 50.0 threshold, which signals a contraction in economic activity.
- US firms stated that they are focusing more on sustaining margins, operating with the available labor force and inventories due to easing confidence in household spending.
- The US Dollar has been performing well as recession fears in the US economy recede due to the stable job market and cooling inflationary pressures. Analysts at Goldman Sachs see a 15% chance that the US economy will slide into a recession. Earlier, the expectations of a recession in the US economy reached 20%.
- Meanwhile, discussions about US-China trade relations have also underpinned the US dollar. US Commerce Secretary Gina Raimondo said on Tuesday, “Don’t expect any changes to US tariffs on China imposed by Trump.”
Technical Analysis: Gold price tests region below $1,920
Gold price extends its two-day losing streak, skids below Tuesday’s low of $1,925.37 as the US Dollar remains resilient due to the risk-off mood. The precious metal slips below the 20 and 50-day Exponential Moving Averages (EMAs). Selling interest in the yellow metal after a recovery move to near $1,950.00 indicates that investors considered the pullback as a fresh selling opportunity. The 200-day EMA will continue to act as a strong cushion for Gold bulls.
What is inflation?
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
What is the Consumer Price Index (CPI)?
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
What is the impact of inflation on foreign exchange?
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
How does inflation influence the price of Gold?
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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