Gold price drops to over one-week low amid reduced Fed rate cut expectations

  • Gold price remains depressed for the third straight day on Monday, albeit lacks follow-through.
  • Expectations that the Fed will keep rates higher for longer continue to undermine the XAU/USD.
  • Geopolitical risks help limit the downside ahead of the key FOMC policy decision on Wednesday.

Gold price (XAU/USD) trades with a negative bias for the third straight day on Monday and drops to the $2,050 level, or over a one-week low during the Asian session. The stronger inflation data released from the US last week fuelled speculations that the Federal Reserve (Fed) will stick to its higher-for-longer interest rates narrative. The outlook remains supportive of elevated US Treasury bond yields, which, in turn, acts as a tailwind for the US Dollar (USD) and undermines the non-yielding yellow metal.

The markets, however, are still pricing in a greater chance that the Fed will start cutting interest rates in June. This, along with geopolitical risks, should help limit the downside for the safe-haven Gold price and should limit deeper losses. Traders might also prefer to wait for more cues about the Fed’s rate-cut path before placing fresh directional bets. Hence, the focus remains glued to the outcome of the highly anticipated two-day FOMC monetary policy meeting, scheduled to be announced on Wednesday.

Daily Digest Market Movers: Gold price is pressured by hawkish Fed expectations, bears seem non-committed

  • Data released last week from the US pointed to some stickiness in inflation and might force the Federal Reserve to keep rates elevated, which, in turn, is seen weighing on the non-yielding Gold price.
  • The University of Michigan’s preliminary survey showed on Friday that one-year and five-year inflation expectations were little changed in March, while the US Consumer Sentiment Index eased to 76.5.
  • The CME Group’s FedWatch Tool, meanwhile, indicates that the possibility of an interest rate cut at the June policy meeting stands at around 60% and holds back the USD bulls from placing fresh bets.
  • Geopolitical risks remain elevated on the back of the protracted Russia-Ukraine war and conflicts in the Middle East, which is seen lending additional support to the perceived safe-haven precious metal.
  • Ukraine last week stepped up drone strikes on Russian oil refineries, while Israeli Prime Minister Benjamin Netanyahu confirmed that he will proceed with plans to push into Gaza’s Rafah enclave.
  • Traders might refrain from placing aggressive directional bets and now look forward to the outcome of the highly anticipated FOMC monetary policy meeting on Wednesday for some meaningful impetus.

Technical Analysis: Gold price could slide further once the $2,145-2,144 horizontal support is broken

From a technical perspective, any further decline is likely to find some support near the $2,145-2,144 region, below which the Gold price could accelerate the fall to the next relevant support near the $2,128-2,127 zone. The corrective slide could extend further towards the $2,100 round figure, which should act as a strong base for the XAU/USD.

On the flip side, the $2,175-2,176 region now seems to have emerged as an immediate strong barrier, which if cleared should allow the Gold price to challenge the record peak, around the $2,195 area touched last week. Some follow-through buying beyond the $2,200 mark will set the stage for the resumption of the uptrend witnessed since the beginning of this month.

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.

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