Gold price plunges amid economic resilience and tight labor market

  • Gold price tumbled quickly as the United States turned out more resilient in the second quarter than expected.
  • The US Dollar Index discovers strength as US GDP expanded by 2.4% vs. expectations of 1.8%.
  • US Durable Goods Orders expanded at a pace of 4.7% against the consensus of 1.0%.

Gold price (XAU/USD) falls like a house of cards as the United States Gross Domestic Product (GDP) turned out more resilient in the second quarter than expected. Earlier, the precious metal remains on the buying list on Wednesday after the Fed raised interest rates by 25 basis points (bps) to 5.25%-5.50%, as expected by market participants. Also, the Fed delivered less-hawkish guidance for the September meeting and passed on responsibility for any further action on economic data.

The US Dollar Index (DXY) is going through tough times as investors hope that the United States central bank has put the last nail in the coffin. Markets see the interest-rate hike in July as the last one in the current aggressive policy tightening spell, and expect that the Fed will keep rates steady ahead. Adding to that, receded fears of a recession in the United States acts as the cherry on the cake for US Dollar bears.

Daily Digest Market Movers: Gold price dives as US economy remains resilient 

  • Gold price rebounds after a corrective move prompted by less-hawkish guidance from the Federal Reserve in its July monetary policy decision announced on Wednesday.
  • The Fed raised interest rates by 25 bps to 5.25%-5.50% as expected by market participants.
  • About interest rate guidance, Fed Chair Jerome Powell left the door open for more interest-rate hikes if economic indicators remain supportive.
  • Less-hawkish monetary policy from the Fed has improved the risk appetite of market participants.
  • The US Dollar Index (DXY) retreats after a less-confident pullback move to near the 101.00 resistance level as investors hope that interest rates by Fed are peaked for this year.
  • Also, fears of a recession in the United States have receded significantly as Fed Chair Jerome confirmed the central bank's staff no longer expects an economic downturn.
  • The odds of a recession in the US economy have faded meaningfully due to the tight labor market.
  • US firms are consistently adding fresh talent even at higher wages to offset labor shortages. This indicates that the economy is resilient despite tight credit conditions and aggressive policy tightening.
  • Fears of a rebound in consumer inflation expectations are increasing as a tight labor market could support consumer spending.
  • The US GDP expanded at a pace of 2.4% in the second quarter, outperforming expectations of 1.8% and the former pace of 2.0%.
  • Also, US Durable Goods Orders for June rose sharply by 4.7% vs. the estimates of 1.0% and May's release of 1.8%.
  • Upbeat momentum in demand for durable goods might keep core inflation stubborn ahead.
  • For the week ending July 21, individuals who applied for jobless claims for the first time landed at 221K, lower than the consensus of 235K and the former release of 228K.
  • The Congressional Budget Office (CBO) revised its forecast for US economic growth for 2023 substantially upward to 0.9% compared with the 0.1% forecast released in February. Economic prospects were lifted in the face of a stronger-than-expected labor market, Reuters reported.
  • Core PCE data, used by the Fed to gauge inflation, is expected to drop to 4.2% in June vs. the 4.6% figure released in May. PCE data will be published on Friday.

Technical Analysis: Gold price finds selling pressure marginally above $1,980

Gold price shifts into a bullish trajectory after a breakout of the consolidation formed in a range between $1,955 and $1,968. The precious metal is swiftly approaching its monthly high of $1,987.35 as investors expect that the Fed has ended the policy-tightening spell for the year. The yellow metal is expected to recapture the psychological resistance of $2,000.00.

Gold price tests the 50% Fibonacci retracement (plotted from May 4 high at $2,067.00 to June 29 low at $1,893) at $1,980.00. Momentum oscillators have climbed into bullish territory, indicating strength in the upside momentum.

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.

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