Gold price struggles to capitalize on the overnight positive move and attracts some sellers on Tuesday.
Reduced Fed rate cut bets lift the USD to its highest level since November and exert some pressure.
The worsening Middle East crisis should lend support to the safe-haven metal and help limit losses.
Gold price (XAU/USD) edges lower during the early European session on Tuesday and reverses a part of the overnight move up from the $2,325-2,324 area, or a multi-day low. The US Dollar (USD) buying remains unabated amid firming expectations that the Federal Reserve (Fed) will keep interest rates higher for longer in the wake of sticky inflation and a resilient US economy. This, in turn, is seen as a key factor exerting some downward pressure on the US Dollar-denominated commodity, though any meaningful corrective decline still seems elusive.
Investors remain conerned on the back of persistent geopolitical risks stemming from the ongoing conflicts in the Middle East, which is evident from a generally weaker tone around the equity markets. Apart from this, bets that major central banks will start cutting interest rates later this year might further contribute to limiting the downside for the non-yielding Gold price. Traders now look to the US macro data, which, along with speeches by influential FOMC members, including Fed Chair Jerome Powell, should provide a fresh impetus to the XAU/USD.
Daily Digest Market Movers: Gold price is pressured by reduced Fed rate cut bets, geopolitics should limit losses
- The global risk sentiment remains fragile amid the worsening Middle East crisis and speculations that the Federal Reserve will keep rates higher for longer, which, in turn, acts as a tailwind for the Gold price.
- Investors have been pushing back their expectations about the timing of the first interest rate cut by the Fed to September from June in the wake of concerns about sticky inflation and a resilient US economy.
- The bets were reaffirmed by stronger-than-expected US Retail Sales data released on Monday, which indicated that consumer spending remains strong and could underpin inflation in the coming months.
- The US Census Bureau reported that Retail Sales rose by 0.7% MoM in March as compared to consensus estimates for a 0.3% increase and the previous month’s upwardly revised growth of 0.9%.
- The yield on the benchmark 10-year US government bond shot to the highest level since November, though the disappointing release of the Empire State Manufacturing Index capped the upside.
- The US Dollar prolongs its recent upward trajectory and climbs to over a five-month peak, which might hold back bulls from placing fresh bets and keep a lid on any further gains for the XAU/USD.
- Tuesday’s US economic docket features the release of housing market data and Industrial Production figures, which along with Fedspeak, might provide some impetus to the non-yielding yellow metal.
Technical Analysis: Gold price could attract some dip-buying at lower levels, $2,325-2,324 support holds the key for bulls
From a technical perspective, the overnight bounce validated the $2,325-2,324 support zone, which should now act as a key pivotal point. A convincing break below has the potential to drag the Gold price to the $2,300 round figure. Some follow-through selling will suggest that the precious metal has topped out in the near term and set the stage for some meaningful depreciating move towards the $2,220 zone with some intermediate support near the $2,250 region.
On the flip side, bulls might now wait for strength beyond the $2,400 mark before placing fresh bets and positioning for a move back towards retesting the record peak, around the $2,431-2,432 region touched last Friday. Given that the Relative Strength Index (RSI) on the daily chart is still flashing overbought conditions, the Gold price could pause near the all-time peak before resuming its recent well-established uptrend witnessed over the past three weeks or so.
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.
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