Gold price bounces off over one-week low, keeps the red amid Fed rate hike jitters

  • Gold price drops to over a one-week low and seems vulnerable to extending its descending trend.
  • The Fed's hawkish outlook pushes the US bond yields higher and exerts pressure on Gold price.
  • The US Dollar sits near the YTD peak and is seen as another factor undermining the XAU/USD.

Gold price (XAU/USD) recovers a bit from a one-and-half-week low touched this Tuesday and trades just below the $1,1915 level during the early European session, down 0.10% for the day. The global risk sentiment takes a hit in the wake of worries about economic headwinds stemming from rising borrowing costs, especially after the Federal Reserve (Fed) indicated last week that it will keep rates higher for longer. this, along with concerns about the worsening economic conditions in China and a real estate crisis in the world's second-largest economy, tempers investors' appetite for riskier assets and lends some support to the precious metal. 

That said, any meaningful recovery for the Gold price still seems elusive in the wake of the underlying bullish tone surrounding the US Dollar (USD), bolstered by the Fed's hawkish outlook. The Fed warned last week that still-sticky inflation in the United States (US) was likely to attract at least one more interest rate hike by the end of this year. Adding to this, the resilient US macro data should allow the Fed to stick to its hawkish stance. The bets were further lifted by hawkish remarks by Minneapolis Fed President Neel Kashkari, saying that borrowing rates probably need to rise further and remain high for some time to bring inflation down to the 2% target. 

The aforementioned fundamental backdrop suggests that the path of least resistance for the Gold price remains on the downside. Traders now look forward to the US economic docket, featuring the release of the Conference Board's Consumer Confidence Index, New Home Sales and the Richmond Manufacturing Index later during the early North American session. This, along with the US bond yields, will influence the USD price dynamics. Traders will further take cues from the broader risk sentiment to grab short-term opportunities around the XAU/USD.

Daily Digest Market Movers: Gold price seems vulnerable amid hawkish Fed expectations

  • The risk-off impulse could assist the safe-haven Gold price to bounce off over a one-week low set this Tuesday.
  • Rising bets for further policy tightening by the Fed should keep a lid on any meaningful recovery for the XAU/USD.
  • Comments by influential FOMC members reaffirms expectations one more 25 basis points (bps) lift-off in 2023.
  • The US economic resilience should further allow the Fed to stick to its hawkish stance and continue raising rates.
  • The benchmark 10-year US Treasury yield touches a fresh 16-year top and the US Dollar hits a 10-month top.
  • Surging bond yields and a stronger USD support prospects for a further depreciating move for the yellow metal.

Technical Analysis: Gold price is likely to retest monthly low around $1,900 mark

Gold price faced rejection near the very important 200-day Simple Moving Average (SMA) on Monday and the subsequent downfall favours bearish traders. Moreover, oscillators on the daily chart have just started gaining negative traction and suggest that the path of least resistance for the XAU/USD is to the downside. Hence, some follow-through weakness back towards retesting the monthly swing low, around the $1,900 round figure, looks like a distinct possibility. Some follow-through selling will be seen as a fresh trigger for bearish traders and pave the way for a further near-term depreciating move.

Risk sentiment FAQs

What do the terms"risk-on" and "risk-off" mean when referring to sentiment in financial markets?

In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.

What are the key assets to track to understand risk sentiment dynamics?

Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.

Which currencies strengthen when sentiment is "risk-on"?

The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.

Which currencies strengthen when sentiment is "risk-off"?

The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.

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