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- Gold price gains as Fed’s signals rate cuts and Middle East woes escalate.
- The Fed acknowledged that policymakers have gained greater confidence due to a slowdown in price pressures in the second quarter.
- Investors await the US ISM Manufacturing PMI and the NFP data for July.
Gold price (XAU/USD) rebounds to near an almost two-week high at $2,458.50 in Thursday’s American session. The precious metal exhibits sheer strength as US bond yields have nosedived on firm expectations that the Federal Reserve (Fed) will pivot to policy normalization in September. 10-year US Treasury yields post fresh six-month low near 4.02%. Lower yields on interest-bearing assets bode well for non-yielding assets, such as Gold, as it reduces the opportunity cost of holding investment in them.
The expectations for the Fed to begin reducing interest rates from September rose after the Fed’s dovish guidance on interest rates on Wednesday. The Fed left interest rates unchanged in the range of 5.25% -5.50% and pointed to cooling inflationary pressures, easing labor market strength, as expected, which made speculation for rate cuts in September as a done deal.
Fed Chair Jerome Powell said, “If we were to see inflation moving down more or less in line with expectations, growth remains reasonably strong, and the labor market remains consistent with current conditions, then I think a rate cut could be on the table at the September meeting”, Reuters reported.
The speculation for Fed rate cuts has improved further due to a sharp decline in preliminary Q2 Unit Labor Costs, a key measure of employee cost beared by the employer. The economic data declined to 0.9% from the estimates of 1.8% and the prior release of 3.8%, downwardly revised from 4.0%.
Daily digest market movers: Gold price recovers after weak US Q2 Unit Costs data
- Gold price rises above $2,450 in Thursday’s North American trading hours. Its near-term outlook remains firm due to multiple tailwinds. Apart from firm expectations that the Fed will start lowering its key borrowing rates from September, upside risks to widening Middle East conflicts have also improved Gold’s safe-haven appeal.
- Iran vows to retaliate for the killing of Hamas leader Ismail Haniyeh by an Israeli air strike in Tehran, stating that Israel will “pay a heavy price”. This has prompted risks of an all-out war in the Middle East. Historically, investors see investment in precious metals as a safe bet amid geopolitical tensions.
- Meanwhile, the US Dollar (USD) rebounds strongly amid widening policy divergence between the Fed and other central banks from G-7 economies. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, bounces back strongly to 104.20 after discovering strong buying interest near the intraday low of 103.86. A sharp recovery in the US Dollar has limited the upside in the Gold price.
- In Thursday’s session, investors will focus on the United States (US) ISM Manufacturing Purchasing Managers’ Index (PMI) report for July, which will be published at 14:00 GMT. The PMI report is expected to show that activities in the manufacturing sector improved, rising to 48.8 from June’s reading of 48.5, but remain contracted. A figure below the 50.0 threshold is considered a contraction in factory activities.
- In the same period, the Manufacturing Prices Paid index is estimated to have expanded at a slower pace of 51.8 from the former release of 52.1. The Prices Paid index is a key measure of change in input prices. A slower growth in this index boosts expectations of cooling inflationary pressures.
- Going forward, the major trigger for the FX domain will be the US Nonfarm Payrolls (NFP) report, which will be published on Friday. Economists have estimated that 175K new workers were hired in July, lower than the former addition of 206K. The Unemployment Rate is expected to remain steady at 4.1%. Investors will keenly focus on the Average Hourly Earnings data, a key measure of wage growth that fuels consumer spending, which eventually influences price pressures. Annually, the wage growth measure is estimated to have decelerated to 3.7% from the prior reading of 3.9%, with the monthly figure growing steadily by 0.3%.
US Dollar Price Today:
US Dollar PRICE Today
The table below shows the percentage change of US Dollar (USD) against listed major currencies today. US Dollar was the strongest against the British Pound.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.33% | 0.53% | 0.33% | 0.11% | 0.11% | 0.09% | -0.08% | |
| EUR | -0.33% | 0.21% | -0.03% | -0.23% | -0.22% | -0.23% | -0.41% | |
| GBP | -0.53% | -0.21% | -0.23% | -0.42% | -0.42% | -0.43% | -0.61% | |
| JPY | -0.33% | 0.03% | 0.23% | -0.22% | -0.22% | -0.29% | -0.44% | |
| CAD | -0.11% | 0.23% | 0.42% | 0.22% | 0.00% | -0.01% | -0.18% | |
| AUD | -0.11% | 0.22% | 0.42% | 0.22% | -0.01% | -0.01% | -0.18% | |
| NZD | -0.09% | 0.23% | 0.43% | 0.29% | 0.01% | 0.00% | -0.17% | |
| CHF | 0.08% | 0.41% | 0.61% | 0.44% | 0.18% | 0.18% | 0.17% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).
Technical Analysis: Gold price rises above $2,450
Gold price trades in a channel formation on a daily timeframe, which is slightly rising but broadly exhibited a sideways performance for more than three months. The 50-day Exponential Moving Average (EMA) near $2,370 continues to provide support to the Gold price bulls.
The 14-day Relative Strength Index (RSI) moves higher to near 60.00. If the RSI climbs above that level, the momentum will shift to the upside.
Fresh upside would appear if the Gold price breaks above its all-time high of $2,483.75, which will send it into an unchartered territory.
On the downside, the upward-sloping trendline at $2,225, plotted from the October 6 low near $1,810.50, will be a major support in the longer term.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.