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- Gold maintains a positive tone with the Dollar weighed down by Fed’s pivot
Gold maintains a positive tone with the Dollar weighed down by Fed’s pivot
- Gold price keeps consolidating with the US Dollar depressed following the Fed’s dovish turn.
- US bond yields remain stuck at multi-month lows, adding negative pressure on the US Dollar.
- Later today, the US S&P Global PMIs and NY Empire State Manufacturing Index might give a fresh boost to Gold prices.
Gold price (XAU/USD) keeps its positive bias intact on Friday’s early European session and is on track to a 2% weekly rally, fuelled by the Federal Reserve’s (Fed) dovish pivot, which sent the US Dollar (USD) tumbling.
Thursday’s data from the US confirmed that the labor market remains strong, and retail sales increased, offering some support for the Dollar. That said, investors remain confident that the Fed will be the first bigger central bank to start easing its monetary policy, which is keeping US Dollar bulls at bay.
Later today, the US preliminary S&P Global PMIs and the NY Empire State Manufacturing Index are expected to endorse the view of softer economic growth. This would allow the Fed to start rolling back its restrictive policy in early 2024, which is bad for the USD and might push Gold a tad higher.
Daily Digest Market Movers: Gold remains strong as Hopes of Fed cuts hurt the US Dollar
- Gold remains supported by a weak US Dollar, as hopes of Fed cuts have sent US Treasury yields plunging.
- The benchmark US 10-year yield is trading at four-month lows below 4%.
- The positive surprise on US retail sales and the larger-than-expected decline in Jobless claims provided some support to the US Dollar on Thursday.
- US Retail Sales rose by 0.3% in November against expectations of a 0.1% decline, and following a 0.2% fall in October.
- US Initial Jobless claims declined to 202K to their lowest level since mid-October.
- Investors keep pricing a nearly 70% chance of a 25 bps rate cut in March, according to the CME Group Fed Watch tool.
- The ECB and the BoE maintained their hawkish tone, pushing back hopes of rate cuts after their respective meetings, which leaves the Fed as the first major central bank to start cutting interest rates.
- On the calendar today, the Preliminary US ISM PMIs and the New York Fed Manufacturing Index are expected to show a mild deterioration from last month, which might give an additional boost to Gold.
Technical Analysis: Gold is pushing against the $2,040 resistance area
From a technical perspective, Gold is regaining bullish impetus following a strong rebound from the $1,970 on Wednesday. The pair, however, needs to breach the $2,040 resistance area to confirm the bullish view.
Such a scenario is likely to attract buyers, with their focus on May’s peak at $2,070 before attempting another assault to the all-time high, at $2,150.
On the contrary, failure to break the mentioned level would see price seek support at $2.015 - $2,020 area where the confluence of the 50 and 100 SMAs in 4-hour charts meet the 50% Fibonacci Retracement of The October - December rally. Below here, bearish pressure would increase with the $1,977 support area coming into play.
Gold FAQs
Why do people invest in Gold?
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.
Who buys the most Gold?
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.
How is Gold correlated with other assets?
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.
What does the price of Gold depend on?
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.
US Dollar FAQs
What is the US Dollar?
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
How do the decisions of the Federal Reserve impact the US Dollar?
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
What is Quantitative Easing and how does it influence the US Dollar?
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
What is Quantitative Tightening and how does it influence the US Dollar?
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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