Gold price struggles to attract buyers, awaits US PCE Price Index for fresh impetus
- Gold price languishes near its lowest level since March 10 touched on Thursday.
- Retreating US bond yields undermines the USD and lends support to the metal.
- Traders look to the US PCE Price Index for cues about the Fed’s rate-hike path.
Gold price (XAU/USD) has been trending lower since the beginning of the current week and plunged to its lowest level since March 10, around the $1,858-1,857 region on Thursday. That said, a sharp US Dollar (USD) pullback from a 10-month peak helps limit the downside, though the commodity struggles to attract any meaningful buying during the Asian session on Friday. Meanwhile, a looming shutdown of the US government on October 1, which poses a risk to the economy, along with persistent worries over China's ailing property sector, lends some support to the safe-haven precious metal.
Any meaningful recovery for the Gold price, however, still seems elusive in the wake of growing acceptance that the Federal Reserve (Fed) will stick to its hawkish stance. In fact, the US central bank warned last week that still-sticky inflation will likely attract at least one more interest rate hike by the end of this year. Furthermore, the US economic resilience should allow the Fed to keep rates higher for longer. This, in turn, should act as a tailwind for the US bond yields and the USD, which, in turn, suggests that the path of least resistance for the non-yielding yellow metal is to the downside.
Traders might also prefer to wait on the sidelines ahead of the release of the US Core PCE Price Index, which is the Fed's primary inflation measure and should influence expectations about the next policy move. This, in turn, will drive USD demand and provide a fresh directional impetus to the non-yielding Gold price. In the meantime, the prospects for further policy tightening by the Fed should act as a tailwind for the US bond yields and the US dollar, keeping a lid on any meaningful appreciating move for the US Dollar-denominated commodity.
Daily Digest Market Movers: Gold price looks to the US Core PCE Price Index for a fresh impetus
- The 10-year US Treasury bond yields retreated from a 16-year peak and drag the US Dollar away from the YTD top.
- A deadlock over demands from Republicans for deep public spending cuts poses the risk of a US government shutdown.
- House Republicans have rejected spending levels for fiscal year 2024 set in a deal between Speaker Kevin McCarthy and President Joe Biden in May 2023.
- The Democratic-led US Senate moved forward with a bipartisan stopgap funding bill to extend federal spending until November 17.
- Growing concerns over slowing Chinese growth and a property market crash continue to weigh on investors' sentiment.
- The US economy grew by a 2.1% annualized pace during the second quarter and reaffirms bets for at least one more Fed rate hike by the year-end.
- Richmond Fed President Thomas Barkin said on Thursday that it was unclear whether more monetary policy changes will be needed in the coming months.
- The market focus remains glued to the crucial US PCE Price Index, which will influence expectations about the Fed's future rate-hike path.
- The Core PCE Price Index is expected to hold steady and rise by 0.2% MoM in August. The yearly rate, however, is projected to decelerate from 4.2% to 3.9% during the reported month.
Technical Analysis: Gold price might consolidate amid oversold RSI on the daily chart
From a technical perspective, the Relative Strength Index (RSI) on the daily chart is flashing oversold conditions and warrants some caution for bearish traders. Hence, it will be prudent to wait for some near-term consolidation or a modest bounce before positioning for any further losses. That said, any attempted recovery is likely to attract fresh sellers and remain capped near the overnight swing high, around the $1,880 region. On the flip side, the multi-month trough, around the $1,858-1,857 area, now seems to protect the immediate downside, below which the XAU/USD could accelerate the slide towards the next relevant support near the $1,820 zone.
What is inflation?
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
What is the Consumer Price Index (CPI)?
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
What is the impact of inflation on foreign exchange?
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
How does inflation influence the price of Gold?
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.