- Gold price soars, supported by weakening US Dollar in face of high Treasury yields.
- XAU/USD was boosted by Fed Chair Powell hinting at rate cuts within the year, contingent on sustained inflation decline.
- Despite a strong job market as shown by ADP data, indications of a slowdown in services activity contribute to the precious metal’s gains.
Gold price climbs steadily, eyeing Wednesday’s $2,300 psychological figure amid high US Treasury bond yields and a soft US Dollar. Speeches from Federal Reserve officials, strong jobs data, and a dip in services business activity weighed on the American currency. Therefore, the XAU/USD spot price is at $2,295, refreshing all-time highs and gaining more than 0.60%.
Recently, Fed Chair Jerome Powell stated the US central bank has time to deliberate about rate cuts, given the strength of the economy and the inflation readings. He reiterated that if the economy evolves as expected, they will cut borrowing costs “at some point this year.”
Nevertheless, Powell emphasized that could happen once they “have greater confidence that inflation is moving sustainably down.”
Earlier, Atlanta Fed President Raphael Bostic acknowledged the robust momentum of the economy yet stressed the necessity for both growth and inflation to decelerate. He forecasts a rate cut in the final quarter of 2024 and envisions inflation aligning with the Fed’s 2% target by 2026.
Additional Insight: While Powell’s hints at rate cuts have supported the gold price, market watchers are closely monitoring inflation data to gauge the likelihood and timing of such cuts in the near future.
The US economic calendar highlighted employment figures and Services PMI. ADP reported higher-than-expected private sector job growth in March, indicating a robust labor market favorable to the US Dollar. However, signs of slowing business activity from recent S&P Global and ISM Services PMI reports have limited the US Dollar’s recovery.
Daily digest movers: Gold price shrugs off hawkish Fed speakers amid mixed data
- The ADP Employment Change for March exceeded expectations, reporting 184,000 jobs added, outperforming the anticipated 148,000 and February’s 155,000.
- In service sector activity, S&P Global noted a decrease in the Services PMI to 51.7 from 52.3, with the Composite Index also dipping from 52.5 to 52.1. The ISM’s Non-Manufacturing PMI fell to 51.4, below the expected 52.7 and the previous 52.6, indicating a slowdown in service sector expansion.
- Cleveland Fed President Loretta Mester expressed that current data does not support a rate cut by the May meeting, but she anticipates three rate cuts in 2024, highlighting the Fed’s task of balancing inflation and employment risks.
- Similarly, San Francisco Fed President Mary Daly emphasized the need to evaluate the duration for maintaining current interest rates. While Daly supports the possibility of three rate cuts, she clarified that this outlook should be seen as a projection rather than a guarantee.
- In terms of the Federal Reserve’s future interest rate movements, the CME FedWatch Tool indicates that traders currently assign a 58% likelihood to the prospect of the US central bank reducing borrowing costs.
Additional Insight: The contrasting views of Fed officials regarding rate cuts create uncertainty in the market and contribute to the volatility of both the US Dollar and the gold price.
Technical analysis: Gold rally to extend as buyers target $2,300
The XAU/USD daily chart suggests the yellow metal is headed toward the $2,300 figure amid renewed buying pressures observed in the Relative Strength Index (RSI). On Monday, I mentioned that “The XAU/USD daily chart depicts Gold’s last uptick to new all-time highs, achieved on lower momentum, as depicted by the Relative Strength Index (RSI).” However, as of writing, the RSI has punched above the 80.00 threshold, an indication that buyers are in charge.
With price action at uncharted territory, the next resistance level would be the $2,300 mark, followed by the $2,350 psychological figure. Up next would be $2,400.
On the other hand, if XAU/USD drops below $2,250, that could sponsor a correction. The first support would be the $2,200 figure, followed by the March 8 high turned support at $2,195, ahead of extending its losses to $2,150.
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.
