- Gold price delivers strong upside move as geopolitical tensions deepen.
- Fed policy, labor market and Manufacturing PMI data for December will remain in the spotlight.
- The Fed is expected to keep interest rates unchanged for the fourth straight time.
Gold price (XAG/USD) remains upbeat as mounting geopolitical tensions have improved the appeal of bullion. The precious metal attracts significant bids as the drone attack on US bases near northeastern Jordan has impacted market sentiment. In addition, a moderate increase in the U S Core Personal Consumption Expenditures (PCE) data for December has softened the inflation outlook.
This week, investors should brace for a high volatile action as the interest rate decision by the Federal Reserve (Fed) will be followed by the Institute of Supply Management (ISM) Manufacturing PMI and Nonfarm Payrolls (NFP) report for December. The Fed is widely anticipated to keep interest rates steady in the 5.25-5.50% range but fresh guidance on interest rates will be keenly watched. Investors would look for cues of whether Fed policymakers continue leaning towards keeping interest rates restrictive till June or are likely to signal a dovish decision for March or May.
Daily Digest Market Movers: Gold price rallies on Middle East crisis
- Gold price discovers strong buying interest on Monday as investors rush for safe-haven assets due to deepening Middle East tensions.
- The precious metal witnesses significant bets as geopolitical tensions mount after a drone attack on US service members stationed in northeastern Jordan.
- Meanwhile, continued attacks on energy shipments in the Red Sea by Iran-backed-Houthis have disrupted the global supply chain.
- This week, market participants will focus on the Federal Reserve’s first monetary policy announcement of 2024, which is scheduled for Wednesday.
- As per the CME FedWatch Tool, investors are pretty confident that interest rates will remain unchanged in the range of 5.25-5.50% for the fourth straight time.
- While major focus will be on the interest rate outlook. Traders see a higher probability of the Fed reducing interest rates from May as policymakers have been reiterating the need for maintaining restrictive interest rates for a longer period until they get convinced that inflation would come down to the 2% target in a timely manner.
- The US Dollar Index (DXY) could come under pressure if the Fed signals that it could commence its rate-cutting campaign from March.
- A soft core PCE price index report for December, released on Friday, failed to uplift expectations of a rate-cut from March.
- Monthly core PCE grew by 0.2% as expected while annual underlying inflation data decelerated to 2.9% against expectations of 3.0% and the former reading of 3.2%.
- Apart from the Fed policy, it will be a volatile week as Manufacturing PMI, and ADP and official Employment data have lined-up for release.
- But first, market participants will look for the US JOLTS Job Openings data, which will be published on Tuesday. This will indicate how strong the labor demand is despite interest rates remaining elevated.
- Investors have anticipated that US employers posted fresh 8.75M jobs in December against 8.79M in November.
Technical Analysis: Gold price climbs to near $2,030
Gold price approaches the horizontal resistance of the Ascending Triangle chart pattern plotted from January 19 high at $2,039.50, on the two-hour timeframe. The upward-sloping border of the aforementioned pattern is plotted from the January 17 low near $2,002. The pattern has a bullish bias, suggesting a breakout higher will follow its completion.
On a daily time frame, the precious metal continues to put efforts for sustainability above the 20-day Exponential Moving Average (EMA), which trades around $2,030.
Gold has played a key role in human’s 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 doesn’t 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 country’s 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.