Gold price jumps to two-week high on Fed rate cut hopes, softer US Dollar
Most recent article: Gold trades higher as central banks start rate-cutting cycle
- Gold price advances to a two-week top amid the emergence of fresh USD selling.
- Rising Fed rate cut bets keep the US bond yields depressed and weigh on the buck.
- Traders look to the US jobless claims for some impetus ahead of the NFP on Friday.
Gold price (XAU/USD) attracts some follow-through buying for the second straight day and climbs to a two-week top, around the $2,375 area during the European session on Thursday. Moreover, the near-term bias remains tilted in favor of bulls in the wake of bets that major central banks will lower borrowing costs to bolster economic activity. In fact, the Bank of Canada (BoC) on Wednesday lowered its benchmark rate for the first time in four years, from a more than two-decade high and signaled concern about slowing economic growth. Furthermore, the European Central Bank (ECB) is also expected to cut interest rates for the first time since March 2016 at the end of its June policy meeting later today.
Meanwhile, the markets are now pricing in a greater chance for an imminent rate cut by the Federal Reserve (Fed) amid signs of a slowdown in the US economy. The expectations keep the US Treasury bond yields depressed near the lowest level in over two months and fail to assist the US Dollar (USD) to build on its modest recovery gains registered over the past two days. This, along with persistent geopolitical tensions stemming from ongoing conflicts in the Middle East, continues to act as a tailwind for the safe-haven Gold price. Despite a combination of supporting factors, the upside for the XAU/USD seems limited as traders keenly await the release of the US Nonfarm Payrolls (NFP) report on Friday.
Daily Digest Market Movers: Gold price draws support from firming Fed rate cut bets, weaker USD
- Mixed US macro data released on Wednesday reaffirmed expectations that the Federal Reserve will start cutting interest rates later this year, dragging the US Treasury bond yields lower and benefiting the non-yielding Gold price.
- The Automatic Data Processing (ADP) reported that private sector employment in the US rose by 152K in May as compared to 173K anticipated and the previous month's downwardly revised reading of 188K (192K reported originally).
- The Institute for Supply Management's (ISM) Services PMI rose to 53.8 in May, registering its highest level since August and surpassing consensus estimates of 50.8, while the Prices Paid sub-component edged lower to 58.1 from 59.2.
- This, along with the softer US Personal Consumption Expenditures (PCE) Price Index on Friday, pointed to easing inflationary pressures and dragged the US Treasury bond yields lower, offering some support to the yellow metal.
- The benchmark 10-year US Treasury yield fell to a two-month low, at 4.28%, and the yield on the rate-sensitive 2-year US government bond slipped to 4.731% amid speculations that the official job data will fall short of expectations.
- The US Dollar did react positively to the data, though a further decline in the US Treasury bond yields offered support to the yellow metal and lifted it to a fresh weekly peak during the Asian session on Thursday.
- Traders now look forward to the release of the Weekly Initial Jobless Claims data from the US for some impetus, though the focus will remain glued to the US monthly employment details, or the Nonfarm Payrolls (NFP) on Friday.
Technical Analysis: Gold price might confront stiff hurdle and remain capped near the $2,400 mark
From a technical perspective, momentum beyond the $2,364 area, or last week's swing high, could be seen as a fresh trigger for bullish traders. That said, mixed oscillators on the daily chart warrant some caution before positioning for any further gains. Hence, any subsequent move up is more likely to confront stiff resistance and remain capped near the $2,400 mark. Some follow-through buying, however, has the potential to lift the Gold price to the next relevant hurdle near the $2,425 zone en route to the $2,450 region, or the all-time peak touched in May.
On the flip side, any meaningful slide back below the $2,360 level might attract fresh buyers around the $2,340 horizontal zone. This should help limit the downside for the Gold price near the $2,315-2,314 area or the multi-week low touched on Tuesday. A convincing break below, however, will confirm a breakdown through the 50-day Simple Moving Average (SMA) and pave the way for deeper losses. the XAU/USD might then weaken further below the $2,300 round-figure mark and test the $2,280 support zone.
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 weakest against the Swiss Franc.
| USD | EUR | GBP | CAD | AUD | JPY | NZD | CHF | |
| USD | -0.72% | -0.75% | -0.30% | -0.65% | -0.97% | -1.28% | -2.35% | |
| EUR | 0.72% | -0.03% | 0.44% | 0.07% | -0.23% | -0.55% | -1.65% | |
| GBP | 0.75% | 0.03% | 0.47% | 0.10% | -0.21% | -0.51% | -1.61% | |
| CAD | 0.29% | -0.44% | -0.47% | -0.39% | -0.67% | -0.98% | -2.09% | |
| AUD | 0.67% | -0.06% | -0.09% | 0.36% | -0.31% | -0.61% | -1.71% | |
| JPY | 0.95% | 0.24% | 0.19% | 0.66% | 0.31% | -0.31% | -1.40% | |
| NZD | 1.26% | 0.56% | 0.51% | 0.97% | 0.61% | 0.34% | -1.09% | |
| CHF | 2.33% | 1.62% | 1.59% | 2.05% | 1.69% | 1.39% | 1.07% |
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).
Interest rates FAQs
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.
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.
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.
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.
Author
Haresh Menghani
FXStreet
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.
