Gold pulls back from seven-week high as bulls struggle to find acceptance above $4,300

Gold attracts buyers for the fourth straight day as hopes for a US-Iran peace deal undermine the USD.
Easing inflation fears temper Fed-hike bets, weighing on US bond yields and also supporting the bullion.
USD bears opt to wait for the crucial NFP report on Friday, capping further gains for the precious metal.

Haresh Menghani FXStreet

Gold (XAU/USD) builds on the previous day's blowout rally of over 4% and advances for the fourth straight session, rising to its highest level since June 18 during the Asian session on Thursday. Hopes of a potential US-Iran peace deal and the reopening of the Strait of Hormuz dragged crude oil prices to an over three-week low on Wednesday. Iran said on Wednesday that it is in the final stage of drafting an agreement with Oman over the strategic waterway, which could help bring an end to the five-month-old US-Iran war. This eased inflation fears and forced traders to scale back their bets for a more aggressive tightening by the US Federal Reserve (Fed). The outlook keeps US Treasury bond yields and the US Dollar (USD) depressed, and is seen supporting the bullion.

Adding to this, the Automatic Data Processing (ADP) reported on Wednesday that private-sector employment in the US grew by 40K in July, marking a notable slowdown from the 95K in the prior month and missing consensus estimates. Separately, data from the Institute for Supply Management (ISM) showed the Services PMI improved a tad to 54.1 in July from 54.0 in the previous month, coming in below expectations for a reading of 54.5. Following the softer data, the probability for a September Fed rate hike eased to roughly 55% from 67%, which continues to undermine the Greenback and acts as a tailwind for the non-yielding Gold. That said, a slew of prominent Fed officials recently warned that persistent inflation risks could necessitate further interest rate hikes.

Fed Governor Lisa Cook stated that inflation remains too high and she is prepared to act by raising interest rates if disinflation stalls, warning that the central bank cannot afford to wait indefinitely if price pressures fail to ease. Meanwhile, San Francisco Fed President Mary Daly noted that officials need more data before the September meeting to see if inflation is temporary or lasting. Nevertheless, traders are still pricing in around an 80% chance that the US central bank will raise borrowing costs by the end of this year amid inflation risks stemming from supply disruptions through the Red Sea. In fact, Iran-backed Houthis in Yemen said ‌that they had launched a missile attack on a Saudi oil tanker off the coast of the port city of Yanbu and another in the Gulf of Aden.

This keeps the geopolitical risk premium in play and helps limit the downside in crude oil prices. Moreover, USD bears seem hesitant and opt to wait for the release of the closely-watched US monthly employment details – popularly known as the Nonfarm Payrolls (NFP) report on Friday – for more cues about the Fed's future policy path. In the meantime, Thursday's US economic docket features the usual Weekly Initial Jobless Claims, which, along with comments from influential FOMC members, will drive the USD demand. Apart from this, further developments surrounding the Middle East crisis could infuse volatility in the global financial markets, which could further provide some impetus to the buck and produce short-term trading opportunities around Gold.

XAU/USD daily chart

Technical Analysis: Gold bulls now await move beyond 23.6% Fibo. before placing fresh bets

The overnight strong move up beyond the 50-day Simple Moving Average (SMA) for the first time since March 17, was seen as a fresh trigger for XAU/USD bulls. Moreover, a firming Moving Average Convergence Divergence (MACD) at 29.52 and a Relative Strength Index (RSI) at 61.28 hint at improving bullish momentum. However, it will still be prudent to wait for some follow-through buying beyond the 23.6% Fibonacci retracement level of the March-June downfall before positioning for any further gains.

The precious metal might then aim to challenge the $4,500 psychological mark – representing the 200-day SMA and the 38.2% Fibo. level confluence. Higher up, the 50.0%, 61.8% and 78.6% retracements at $4,678.89, $4,853.49 and $5,102.07 respectively outline subsequent bullish objectives if the current band is cleared. On the downside, immediate support is provided by the 50-day SMA at $4,157.24, while a deeper setback would likely look toward the Fibonacci cycle low area near $3,939.05 as a more substantial structural floor.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

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

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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