Gold looks to build on Tuesday’s post-US CPI bounce from one-week-low
- Gold edges higher as US CPI lifts Fed rate cut bets and weighs on USD.
- The upbeat market mood is seen acting as a headwind for the commodity.
- Traders now look to speeches from FOMC members for a fresh impetus.
Gold (XAU/USD) is trading with a positive bias during the Asian session on Wednesday and looking to build on the previous day's bounce from the $3,331 area, or a one-and-a-half-week low. The broadly in-line July US consumer inflation figures released on Tuesday reinforced bets that the Federal Reserve (Fed) will lower borrowing costs at the upcoming monetary policy meeting in September. This keeps the US Dollar (USD) on the defensive and turns out to be a key factor acting as a tailwind for the non-yielding yellow metal.
However, the underlying bullish sentiment, bolstered by an extension of the US-China trade truce and the US-Russia summit aimed at ending the war in Ukraine, might cap the upside for the safe-haven Gold. This, along with the recent repeated failures to find acceptance above the $3,400 mark, makes it prudent to wait for strong follow-through buying before confirming that the XAU/USD pair has formed a near-term bottom. Traders now look to speeches from influential FOMC members for some impetus later this Wednesday.
Daily Digest Market Movers: Gold bulls seem reluctant amid mixed fundamental cues
- The US Bureau of Labor Statistics reported on Tuesday that the headline Consumer Price Index (CPI) remained unchanged at 2.7% on a yearly basis in July. However, the core gauge, which excludes food and energy prices, came in above market estimates and increased to the 3.1% YoY rate from the 2.9% in June.
- On a monthly basis, the CPI and the core CPI rose by 0.2% and 0.3%, respectively, matching expectations. Nevertheless, the data alleviated concerns that trade-related costs might contribute to broader price pressures and keep a September rate cut by the Federal Reserve on the table, amid signs of labor market weakness.
- Moreover, CME Group's FedWatch Tool indicates that traders are pricing in the possibility that the US central bank will lower borrowing costs at least twice by the year-end. This keeps the US Dollar depressed near the post-US CPI swing low and acts as a tailwind for the non-yielding Gold on Wednesday.
- On the trade-related front, US President Donald Trump signed an executive order on Monday extending a tariff truce with China for another three months. This helped to ease concerns about a trade war between the world's two largest economies and remains supportive of the upbeat market mood amid hopes that the upcoming US-Russian summit on Friday will increase the chances of ending the prolonged war in Ukraine.
- The S&P 500 and the Nasdaq posted record closing highs on Tuesday, while Japan's Nikkei 225 reached the 43,000 mark for the first time ever on Wednesday. This is seen undermining traditional safe-haven assets and might hold back the XAU/USD bulls from placing aggressive bets. In the absence of any relevant market-moving macro data from the US, traders will take cues from Fed speakers to grab short-term opportunities.
- The market attention will then shift to the release of the US Producer Price Index (PPI) on Thursday and the Preliminary University of Michigan US Consumer Sentiment Index on Friday. Nevertheless, the mixed fundamental backdrop warrants some caution before positioning for any further appreciating move.
Gold price needs to surpass $3,358-3,360 immediate hurdle to back the case for further gains
From a technical perspective, the XAU/USD pair, barring the previous day's knee-jerk downward spike, has been oscillating in a familiar band since the early part of this week. The range-bound price action might still be categorized as a bearish consolidation phase against the backdrop of the recent sharp retracement slide from levels just above the $3,400 mark. Moreover, negative oscillators on hourly/daily charts suggest that the path of least resistance for the Gold is to the downside. That said, it will still be prudent to wait for acceptance below the $3,243-3,242 region (200-period SMA on H4) before positioning for a fall to the $3,300 round figure.
On the flip side, the $3,358-3,360 supply zone now seems to have emerged as an immediate strong barrier. A sustained move beyond has the potential to lift the XAU/USD pair to the $3,380 area en route to the $3,400 mark. Some follow-through buying beyond last week's swing high, around the $3,409-3,410 area, would be seen as a fresh trigger for the Gold bulls and pave the way for a move towards the next relevant hurdle near the $3,422-3,423 area. The momentum could extend further towards the $3,434-3,435 horizontal resistance, above which the commodity might aim towards challenging the all-time peak, around the $3,500 psychological mark touched in April.
Gold FAQs
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.