Gold price holds positive ground ahead of Fed Chair Powell’s second testimony


Most recent article: Gold recovers as central-bank demand remains robust

  • The Gold price gains traction in Wednesday’s early European session. 
  • Rising Fed rate cut bets continue to lift the yellow metal. 
  • The PBoC refrained from buying gold for a consecutive  month, limits XAU/USD upside. 

The Gold price (XAU/USD) trades with mild gains on Wednesday during the early European session. The growing speculation that the US Federal Reserve (Fed) is likely to start cutting rates as early as September continues to support the non-yielding metal. Furthermore, political uncertainties within Europe and globally might boost Gold price, a traditional safe-haven asset.

On the other hand, the pause of China's central bank Gold purchases for a second consecutive month might prompt traders to reduce bullish bets in the yellow metal as China is the world's largest gold consumer. Investors will keep an eye on the second semi-annual testimony by Federal Reserve (Fed) Chair Jerome Powell on Wednesday, along with speeches by the Fed's Michelle Bowman and Austan Goolsbee. On Thursday, the US Consumer Price Index (CPI) inflation data will be closely monitored. This data might offer more clarity on the US interest rate path.

Daily Digest Market Movers: Gold price gains traction amid rising Fed rate cut bets

  • China held its gold reserves steady for the second month in a row in June, after an 18-month period of purchases. Official data from China’s central bank shows its gold reserves holdings at 2,264 tonnes.
  • Federal Reserve (Fed) Chair Jerome Powell said in testimony Tuesday to Congress that the most recent inflation data showed some modest further progress and "more good data" could open the door to interest rate cuts. 
  • Powell emphasized that the central bank will continue to make decisions on monetary policy meeting by meeting, adding that holding interest rates too high for too long could jeopardize economic growth. 
  • Powell further stated that inflation readings over the first three months of this year did not boost Fed officials’ confidence that inflation was coming under control.
  • Financial markets are now pricing in 74% odds of a Fed rate cut in September, up from 71% last Friday, according to data from the CME FedWatch tool. 

Technical Analysis: Gold price holds bullish in the longer term

The gold price trades on a stronger note on the day following the break above the descending channel. The precious metal maintains its uptrend above the key 100-day Exponential Moving Average (EMA) on the daily timeframe. The upward momentum is also supported by the 14-day Relative Strength Index (RSI), which stands in the bullish zone around 55.0. 

The crucial resistance level for yellow metal will emerge at the $2,400 psychological level. The next hurdle is seen at $2,432, a high of April 12. Sustained trading above this level could set XAU/USD for a potential retest of the all-time high of $2,450.

On the other hand, sustained trading below $2,340, the former resistance level, could draw in enough bearish demand to head $2,318, a low of July 1. The next contention level to watch is $2,274, the 100-day EMA. 

US Dollar price in the last 7 days

The table below shows the percentage change of US Dollar (USD) against listed major currencies in the last 7 days. US Dollar was the strongest against the Japanese Yen.

  USD EUR GBP CAD AUD JPY NZD CHF
USD   -0.66% -0.81% -0.34% -1.17% -0.01% -0.20% -0.72%
EUR 0.66%   -0.16% 0.32% -0.50% 0.65% 0.45% -0.06%
GBP 0.80% 0.15%   0.48% -0.34% 0.80% 0.61% 0.09%
CAD 0.33% -0.33% -0.48%   -0.83% 0.33% 0.13% -0.38%
AUD 1.15% 0.50% 0.36% 0.82%   1.14% 0.94% 0.42%
JPY 0.01% -0.64% -0.81% -0.32% -1.16%   -0.19% -0.71%
NZD 0.20% -0.45% -0.61% -0.12% -0.95% 0.20%   -0.52%
CHF 0.71% 0.03% -0.09% 0.39% -0.45% 0.68% 0.51%  

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).

Inflation FAQs

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%.

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.

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.

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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