- Gold price struggles to capitalize on Friday’s breakout momentum amid a positive risk tone.
- Fed rate cut bets, along with geopolitical risks, might continue to lend support to the metal.
- Traders look to FOMC minutes and Fed Chair Powell’s speech this week for a fresh impetus.
Gold price (XAU/USD) kicks off the new week on a softer note and reverses a part of Friday’s strong move up to a fresh record high – levels beyond the $2,500 psychological mark. The prevalent risk-on mood – bolstered by easing fears about a possible recession in the United States (US) – is seen as a key factor undermining demand for the safe-haven precious metal. Apart from this, the downtick lacks any catalyst and is more likely to remain cushioned in the wake of dovish Federal Reserve (Fed) expectations.
Apart from this, geopolitical risks stemming from the ongoing conflicts in the Middle East and the protracted Russia-Ukraine war might continue to act as a tailwind for the Gold price. Traders might also opt to wait for more cues about the Fed policy path before placing aggressive bets and positioning for the next leg of a directional move. Hence, the market focus will remain glued to the release of the FOMC meeting minutes on Wednesday and Fed Chair Jerome Powell’s appearance at the Jackson Hole Symposium.
Daily Digest Market Movers: Gold price bulls take a breather amid the upbeat market mood, limited downside potential
- Dovish Federal Reserve expectations, along with rising geopolitical tensions in the Middle East, lifted the Gold price to a fresh record high – levels beyond the $2,500 psychological mark – on Friday.
- The US Producer Price Index and Consumer Price Index released last week indicated that inflation is on a downward trend, which keeps the Fed on track for a 25-basis-point rate cut in September.
- This, to a larger extent, overshadowed Thursday’s upbeat US Retail Sales data, which eased concerns about a recession in the world’s largest economy and attracted fresh sellers around the US Dollar.
- Furthermore, the University of Michigan’s preliminary report showed that the US Consumer Sentiment Index improved for the first time after four months of declines and rose to 67.8 in August.
- Another key part of the report revealed that expectations for overall inflation over the next year held steady at 2.9% and over the next five years was unchanged for the fifth straight month at 3%.
- This, however, did little to impress the USD bulls amid bets for an imminent start of the Fed’s policy easing cycle, which has been a key factor driving flows towards the non-yielding yellow metal.
- Chicago Fed President Austan Goolsbee said the US economy is not showing signs of overheating, so central bank officials should be wary of keeping restrictive policy in place longer than necessary.
- San Francisco Fed President Mary Daly downplayed concerns about a sharp US economic slowdown, though said that the US central bank needs to take a gradual approach to lower borrowing costs.
- Investors now look to the FOMC minutes, due for release on Wednesday, and Fed Chair Jerome Powell’s comments at the Jackson Hole Symposium on Friday for cues about future rate-cut path.
- On the geopolitical front, Hamas published an official statement on Sunday rejecting the terms for a hostage release-ceasefire deal which were discussed in Doha on Thursday and Friday.
- Russia vowed to retaliate to Ukraine’s unexpected cross-border attack into the Kursk region that marked the first time since World War Two that a foreign army has been fighting in the country.
Technical Analysis: Gold price is more likely to attract dip-buyers near $2,470-2,472 resistance-turned-support
From a technical perspective, Friday’s breakout through the $2,470-2,472 horizontal barrier and a subsequent strength beyond the previous all-time high was seen as a fresh trigger for bullish traders. Furthermore, oscillators on the daily chart are holding in positive territory and are still away from being in the overbought zone, suggesting that the path of least resistance for the Gold price is to the upside. That said, failure to build on the momentum beyond the $2,500 psychological mark warrants some caution for bulls. Hence, it will be prudent to wait for some follow-through buying beyond Friday’s allow-time peak, around the $2,509-2,510 area, before positioning for any further gains.
On the flip side, the $2,472-2,470 resistance breakpoint now seems to protect the immediate downside. Any further decline is more likely to attract fresh buyers and remain limited near the $2,448-2,446 region. The latter should act as a key pivotal point for short-term traders, which if broken decisively should pave the way for deeper losses. The Gold price might then accelerate the corrective slide towards the 50-day Simple Moving Average (SMA), currently pegged near the $2,388-2,387 zone, with some intermediate support near the $2,400 round figure.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.