Forex News

12:04:43 19-07-2024

Gold price extends losing spell as profit-booking kicks in, US Dollar bounces back

  • Gold price falls further to near $2,410 as US political uncertainty boosts US Dollars appeal.
  • US President Joe Biden could drop his re-election bid due to medical conditions.
  • The Fed is widely anticipated to begin reducing interest rates in September.

Gold price (XAU/USD) extends its losing streak for the third trading day, declining to near $2,410 in Fridays European session. The precious metal faces profit-booking after rallying to fresh all-time highs above $2,480 on Tuesday. The yellow metal has also been weighed down by a decent recovery in the US Dollar (USD) and bond yields amid growing speculation that the Republican Party will be victorious in the United States (US) Presidential elections later this year.

The expectations for Donald Trump returning as US President increased after an assassination attack on him. Meanwhile, increasing prospects that US President Joe Biden could drop his re-election bid due to medical conditions have also fuelled chances of Trump having a victory in the Presidential elections. Trump is known for favoring protectionist trade policies, which improves the US Dollars appeal.

The US Dollar Index (DXY), which tracks the Greenbacks value against six major currencies, bounces back to near 104.30. A higher US Dollar makes investment in Gold an expensive bet for investors. 10-year US Treasury yields jump to 4.21%. Higher yields on interest-bearing assets increase the opportunity cost of holding an investment in non-yielding assets, such as Gold. 

Daily digest market movers: Gold price drops sharply while the near-term outlook remains firm

  • Gold price slides further to near $2,410 amid strong recovery in the US Dollar. However, the near-term appeal of Gold remains firm as investors see expectations for the Federal Reserve (Fed) to begin reducing interest rates in September as certain. 
  • Expectations for the Fed to initiate a move toward policy normalization in September rose as policymakers gained slight confidence that inflation has returned on its path to the central banks target of 2%. However, officials still want to see more soft inflation data to gain greater confidence in lowering interest rates.
  • Market speculation for Fed rate cuts was boosted by the June Consumer Price Index (CPI) reading, which signaled that the disinflation process has resumed after stalling in the first half of the year. Annual headline and core CPI, which excludes volatile food and energy prices, decelerated at a faster-than-expected pace. Meanwhile, monthly headline inflation deflated for the first time in more than four years.
  • Apart from easing price pressures, cooling US labor market conditions have also uplifted Fed rate-cut prospects. The Unemployment Rate rose to 4.1% in June, the highest since November 2021. On Thursday, individuals claiming jobless benefits for the first time were higher than expectations for the week ending July 12. The Initial Jobless Claims came in at 243K, higher than estimates of 230K and the former release of 223K.
  • Due to the absence of top-tier US data on Friday, investors will focus on speeches from Fed policymakers: New York Fed Bank President John Williams and Atlanta Fed Bank President Raphael Bostic are due to speak during the New York session. Investors will focus on cues about when the Fed will start cutting interest rates. 

Technical Analysis: Gold price holds key EMAs

Gold price slides further to near $2,410 in Fridays European session. The precious metal weakens after failing to sustain above the crucial figure of $2,450. The near-term outlook of the Gold price remains firm as short-to-long-term Exponential Moving Averages (EMAs) are sloping higher. 

The advancing trendline plotted from the February 14 low at $1,984.30 will be a major support for Gold bulls. 

The 14-day Relative Strength Index (RSI) drops to 58.00, suggesting the upside momentum has stalled. However, the upside bias remains intact.

Gold FAQs

Gold has played a key role in humans history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesnt rely on any specific issuer or government.

Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a countrys solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.

Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.

The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.

 

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