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Gold price recovers, capitalized on downbeat PMI data

  • Gold price extends upside as US PMI data remains weaker-than-anticipated.
  • Fed’s Barkin hopes that the US recession will be “less severe”.
  • Strength in Gold prices has come from restrictive upside in US Treasury yields.

Gold price (XAU/USD) maximizes gains as US Treasury yields and the US Dollar face selling pressure due to weak preliminary PMI data for August, reported by S&P Global. Manufacturing PMI drops significantly to 47.0 vs. expectations of 49.3 and July's reading of 49.3. Also, Services PMI underperformed estimates of 52.2, and the former release of 52.3, landed at 51.0. The US Dollar slipped sharply to near 103.60 after facing stiff resistance near 104.00. Meanwhile, 10-year US Treasury yields plunged to near 4.20%.

In his commentary at the Jackson Hole Symposium, Fed Chair Jerome Powell is expected to explain the benefits of keeping rates higher for longer and he is also likely to avoid supporting further policy tightening in the absence of encouraging economic data. US headline Consumer Price Index (CPI) has come down to 3.2% from its peak of 9.1% due to an aggressive rate-tightening cycle, but the Fed will likely have to keep interest rates higher for a longer period as the remaining excess inflation above the desired rate of 2% seems extremely stubborn.

Daily Digest Market Movers: Gold price jumps as US Dollar drops sharply

  • Gold price climbs to near $1,916, supported by sluggish US Treasury Yields ahead of the Jackson Hole Economic Symposium.
  • 10-year US Treasury Yields dropped below 4.30% as Fed Chair Jerome Powell is not expected to explicitly refer to further policy-tightening at the Jackson Hole event.
  • Richmond Fed Bank President Thomas Barkin said the recent moves in bond yields are not a sign of inappropriate market tightening but rather likely a response to strong economic data.
  • About the interest rate guidance, Thomas Barkin said if inflation remains high and signs of a drop in demand remain absent. The situation will force the need for tighter monetary policy.
  • Fed Barkin further added that the recession situation in the US economy will be “less-severe’’.
  • Investors expect Powell will suggest that interest rates are likely to remain higher for a longer period so that inflation can return to 2%.
  • Apart from the interest rate guidance, investors will also focus on the labor market and the inflation outlook.
  • Market participants expect that Fed policymakers will have to spend more blood and sweat to shred the ‘last mile’ of inflation, which is the remaining path towards the desired rate of 2%. Therefore, the Fed is expected to keep interest rates higher for longer.
  • S&P Global reported that Manufacturing PMI dropped significantly to 47.0 vs. expectations of 49.3 and July's reading of 49.3. Also, Services PMI underperformed estimates of 52.2, and the former release of 52.3, landed at 51.0.
  • After the preliminary S&P Global PMI, investors will shift their focus to the Durable Goods Orders for July, which will be released on Thursday at 12:30 GMT. Orders are expected to contract by a sharp 4.0%. In June, Durable Goods Orders expanded by 4.6%.
  • The US Dollar Index (DXY) delivers a solid break above the crucial resistance of 103.70 as investors continue to flush liquidity due to strong US economic resilience.
  • Meanwhile, the US bank regulator Federal Deposit and Insurance Corporation (FDIC) will propose new rules overhauling how large regional banks are prepared for a potential failure on August 29. US bank regulators are worried about potential risks due to rising borrowing costs.
  • US National Security Adviser Jake Sullivan said on Tuesday that US Commerce Secretary Gina Raimondo will travel to China next week with a message that the US is not seeking to decouple from China, reported Reuters.

Technical Analysis: Gold price approaches $1,920

Gold price attempts to deliver a break of the consolidation formed in a range of $1,885-1,900 in the past week.  The precious metal rebounds after hitting a fresh five-month low near $1,885.00. However, the broader bias is still favoring the downside due to strengthening US Treasury yields. Despite a three-day recovery, the yellow metal struggles around the 200-day Exponential Moving Average (EMA). Declining 20 and 50-day EMAs indicate a bearish mid-term trend.

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.

Author

Sagar Dua

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.

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