- Gold price snaps a four-day winning streak to a two-week high set on Tuesday.
- A positive risk tone and a modest USD uptick undermine the precious metal.
- Rising Fed rate cut bets might cap the Greenback and support the commodity.
Gold price (XAU/USD) maintains its offered tone through the early European session on Wednesday and for now, seems to have snapped a four-day winning streak to a nearly two-week high touched the previous day. A generally positive tone around the equity markets is seen undermining demand for the safe-haven precious metal. However, a combination of supporting factors could help limit losses for the commodity and warrants caution for bearish traders.
Last Friday’s weaker-than-expected US Nonfarm Payrolls (NFP) report, along with the disappointing US ISM Services PMI released on Tuesday, fueled concerns about the health of the world’s largest economy. This, in turn, reaffirms market bets that the US Federal Reserve (Fed) will resume its rate-cutting cycle in September, which keeps the US Dollar (USD) bulls on the defensive and should continue to act as a tailwind for the non-yielding Gold price.
Daily Digest Market Movers: Gold price bulls remain on the sidelines; downside potential seems limited
- Asia equity markets mostly rose on Wednesday as investors assessed the disappointing US macro data, which fueled economic worries and pushed Wall Street lower on Tuesday. In fact, the Institute for Supply Management (ISM) reported that its Services Purchasing Managers’ Index (PMI) slipped to 50.1 in July from 50.8 in the previous month.
- Additional details of the report showed that the Employment Index ticked lower to 46.4 from 47.2, and the New Orders Index deflated to 50.3 during the reported month from 51.3 in June. This comes on top of softer July US jobs data and underscores the ongoing drag on the economy amid the uncertainty over US President Donald Trump’s trade policies.
- Nevertheless, traders have ramped up their bets that the Federal Reserve will lower borrowing costs at the September policy meeting and are pricing in the possibility of more than two 25-basis-point rate cuts by the end of this year. This fails to assist the US Dollar in attracting any meaningful buyers and should act as a tailwind for the non-yielding Gold price.
- On the trade-related front, Trump announced that US tariffs on semiconductor and pharmaceutical imports will be imposed within the next week or so. Moreover, the Trump administration has already imposed levies on imports of cars and auto parts as well as steel and aluminum. This keeps investors on edge and should further support the commodity.
- There isn’t any relevant market-moving economic data due for release from the US on Wednesday, leaving the USD at the mercy of comments from influential FOMC members. Apart from this, the broader risk sentiment could drive the safe-haven XAU/USD and produce trading opportunities ahead of the latest US inflation figures next week.
Gold price constructive setup backs the case for the emergence of dip-buying near 100-SMA on H4
From a technical perspective, the overnight bounce from the 100-period Simple Moving Average on the 4-hour chart, along with positive oscillators on hourly/daily charts, favors the XAU/USD bulls. That said, Wednesday’s failure ahead of the $3,400 mark makes it prudent to wait for a sustained strength beyond the said handle before positioning for any further gains. The subsequent move up could lift the Gold price to the $3,434-3,435 pivotal resistance, which, if cleared decisively, will set the stage for a retest of the all-time peak, around the $3,500 psychological mark touched in April.
On the flip side, the $3,350 area, or the 100-period SMA on the 4-hour chart, should continue to act as an immediate strong support. A convincing break below, however, might prompt some technical selling and make the Gold price vulnerable to accelerate the slide towards the $3,322 intermediate support en route to the $3,300 round figure. Acceptance below the latter would expose the $3,268 region, or a one-month low touched last week.
Fed FAQs
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.
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.
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.
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.
