- Gold retracts sharply from recent highs, influenced by reduced geopolitical risks and a strengthening US Dollar.
- Fed officials, including Chairman Powell, maintain a hawkish stance on interest rates, pressuring Gold prices.
- Market sentiment shifts as expectations for Federal Reserve rate cuts are adjusted to a later timeline.
Gold prices plummet sharply and retrace last week’s gains, down more than 2.50% as the Middle East’s woes abate. The pullback in the price of gold metal could be attributed to profit-taking, as mentioned by Jim Wyckoff of Kitco News, alongside some modest strength in the US Dollar.
XAU/USD trades at $2,329 after hitting a daily high of $2,392, sponsored by last Friday’s increasing tensions between Israel and Iran. Also, market participants are beginning to price out that the Federal Reserve (Fed) would cut rates later than expected, further weighing on Gold prices.
Tehran downplayed Israel’s retaliation drone strike on April 19 in what was perceived as an escalation of the conflict.
Elsewhere, Federal Reserve officials struck hawkish remarks led by Chairman Jerome Powell, who commented that the lack of progress on the disinflation process warrants keeping interest rates higher for longer. Echoing his comments was Chicago Fed, Austan Goolsbee, one of the most dovish members of the FOMC, who said that progress on inflation has “stalled.”
Daily Digest Market Movers: Gold retreats as US manufacturing activity accelerates
- Chicago Fed National Activity Index increased to 0.15 in March from 0.09 in February. The index’s three-month moving average increased from -0.28 in February to -0.19 in March.
- The US 10-year Treasury benchmark rate is down one basis point in the week at 4.611%.
- US Dollar Index (DXY), which tracks the buck’s performance against a basket of six other currencies, is up 0.01% to 106.13.
- Further, Fed speakers crossed the wires. Atlanta Fed’s Raphael Bostic noted that inflation is too high, adding that the Fed won’t be able to reduce rates. New York Fed President John Williams stated that the Fed is data-dependent and emphasized that monetary policy is in a good place, so he wasn’t in a rush to cut rates
- This week, the economic docket in the United States (US) will feature the release of the Fed’s preferred gauge for inflation, the March Personal Consumption Expenditure (PCE) Price Index. A softer reading than expected could prompt Gold traders to buy the yellow metal and aim to refresh all-time highs. Otherwise, a rise in prices could underpin US Treasury yields and the Greenback, a headwind for the non-yielding metal.
- The PCE is expected to edge higher, while the Core PCE is expected to decrease from 2.8% to 2.6% YoY.
- Data from the Chicago Board of Trade (CBOT) suggests that traders expect the fed funds rate to finish 2024 at 4.99%.
Technical Analysis: Gold plunges as sellers eye $2,300
Gold price nosedived and formed a ‘bearish engulfing’ chart pattern, which opened the door for a retracement. If XAU/USD prices dip below the April 15 daily low of $2,324, that would pave the way to test $2,300. A breach of the latter will expose the March 21 high at $2,222.
On the other hand, XAU/USD’s first resistance would be $2,400, followed by Friday’s high of $2,417. A breach of the latter will expose the all-time high of $2,431.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
### Insight on Gold Price Movement
The movement of gold prices is heavily influenced by various factors, including geopolitical tensions, changes in interest rates, and economic data. In this case, the retreat in gold prices can be attributed to a combination of reduced geopolitical risks and the strengthening US Dollar. It is essential to monitor these factors closely to gauge the future direction of gold prices.
### Federal Reserve’s Impact on Gold
The hawkish stance maintained by Federal Reserve officials, particularly Chairman Powell, plays a significant role in pressuring gold prices. The market sentiment is also shifting as expectations for rate cuts are pushed back, affecting the demand for gold as a safe-haven asset. Investors should keep an eye on Fed announcements and economic indicators for insights into future gold price movements.
### Technical Analysis and Price Levels
From a technical perspective, the bearish engulfing pattern in gold price charts indicates a potential retracement. Traders and investors should watch key support and resistance levels, such as $2,300 and $2,400, to gauge the short-term direction of XAU/USD. Monitoring these levels can help in making informed trading decisions based on price movements and market sentiment.
