Gold price tumbles as Greenback fights back, US Retail Sales in spotlight
- Gold has witnessed intense selling pressure and has dropped below $1,950.00 amid a recovery in the US Dollar Index.
- The sentiment of United States households has improved as inflation has softened beyond expectations.
- Hot discussions about the introduction of gold-backed currency by BRICS have improved the appeal for Gold.
Gold (XAU/USD) price has refreshed its day's low at $1,946.00 amid a solid recovery in the US Dollar Index (DXY). The recovery move in the precious metal is backed by an extended weakness in the US Dollar due to easing inflationary pressures in the United States and discussions about an introduction of gold-backed currency by BRICS (Brazil, Russia, India, China, and South Africa) whose motive could be easing the dependence on the Greenback.
Consistently softening of United States inflation amid a stable labor market has improved the sentiment of consumers. Michigan’s Consumer Sentiment Index logged fresh 21-month highs as the burden of high inflation upon households is receding. As inflation has turned out softer than expected and the labor market is also releasing heat, investors are awaiting the release of the US Retail Sales data for further guidance.
Daily Digest Market Movers: Gold price tumbles as Greenback recovers
- Gold price has made a recovery move after building a base around $1,950.00 as the US Dollar Index is struggling to revive.
- The US Dollar logged a maximum decline on a weekly basis since November as investors are hoping that interest rates by the Federal Reserve (Fed) will find a peak at 5.25-5.50%.
- Optimism about only one more interest rate hike from the Fed among investors has built due to consistently declining inflation and the labor market conditions have started releasing heat.
- United States inflation report demonstrated a nominal pace in June due to higher interest rates by the Fed and tight credit conditions by US commercial and regional banks.
- US regional banks have inculcated more filters on the credit-disbursement process to maintain asset quality.
- Contrary to investors’ expectations, Fed Chair Jerome Powell and Fed Governor Christopher Waller believe that two more interest rate hikes by the year-end are appropriate.
- Chicago Fed Bank Austan Goolsbee said on Friday that inflation is still higher than where the Fed wants it to be but has shown progress.” Goolsbee reiterated that central bank policymakers are on a "golden path" to containing inflation without triggering recession.
- Market mood is a little cautious as US corporate has started releasing earnings data.
- Meanwhile, consumer sentiment in the United States has improved significantly in which major contributors are declining inflation and a stable labor market. The University of Michigan reported on Friday that the preliminary Consumer Sentiment Index (CSI) has logged the highest reading since November 21 at 72.6.
- Preliminary forward five-year consumer inflation expectations matched expectations at 3.1% vs. the prior release of 3.0%.
- This week, investors will keep their focus on the US Retail Sales data, which will be printed on Tuesday at 12:30 GMT.
- Investors are anticipating an expansion in retail demand at a higher pace of 0.5% than the former pace of 0.3%. Retail Sales excluding automobiles are expected to post a 0.3% expansion vs. the prior release of 0.1%.
- Persistent demand from US households could elevate bets for a small interest rate hike from the Fed in its July monetary policy meeting.
- Recovery in the Gold price is also backed by heavy discussions about the introduction of a new Gold-backed currency by the BRICS alliance. The agenda looks clear to avoid heavy dependence on the US Dollar.
- According to the World Gold Council, 71% of global central banks are planning to significantly increase their Gold purchases in the next 6 months by an estimated total of 700 metric tons – worth $49 billion before year-end.
Technical Analysis: Gold price extends downside below $1,950
Gold price is gathering strength to deliver a breakout of the Rounded Bottom chart pattern. A breakout of the aforementioned pattern would send Gold bulls into new territory. Gold bulls would manage to deliver a breakout of the Rounded Bottom by confidently surpassing the horizontal resistance plotted around $1,970.00.
Momentum oscillators are conveyed a non-directional performance as a fresh economic trigger is required for further action.
Fed FAQs
What does the Federal Reserve do, how does it impact the US Dollar?
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
How often does the Fed hold monetary policy meetings?
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
What is Quantitative Easing (QE) and how does it impact USD?
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
What is Quantitative Tightening (QT) and how does it impact the US Dollar?
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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.
