Gold brights and surges amid elevated US yields on Fed rate cut hopes

Gold

Jun 20, 2024 6:34 PM

Gold advances sharply, gaining over 1% amid weakening US economic indicators.
Softer US jobs and housing data increase expectations of two 25-bps Fed rate cuts in 2024.
Rising geopolitical tensions in the Middle East and North Korea-Russia pact enhance Gold's safe-haven appeal.

Gold prices advanced sharply by more than 1% on Thursday during the North American session as US Treasury bond yields advanced to underpin the Greenback. Data from the United States was softer than expected, boosting traders' confidence that the Federal Reserve (Fed) will ease policy at least twice in 2024. The XAU/USD trades at $2,356 at the time of writing.

The latest economic data from the US continued to show that the economy is decelerating, prompting investors to price in two 25-basis-point (bps) interest rate cuts. A worse-than-expected US jobs report revealed the number of Americans filing for unemployment benefits rose above estimates.

US housing data disappoints markets as Building Permits and Housing Starts cooled.

In the meantime, Minneapolis Fed President Neel Kashkari stated that it will likely take a year or two to bring core inflation down to 2%. He added that the trajectory of interest rates would depend on the economic conditions, emphasizing, "We are achieving disinflation despite remarkable economic growth."

Rising geopolitical risks helped the golden metal uptrend. Tensions in the Middle East are rising as Israel threatens to launch an attack on Hezbollah in Lebanon. That, along with the recently signed pact between Russia and North Korea, could increase the appeal for the yellow metal, which is trading near a crucial resistance level.

The CME FedWatch Tool shows that the odds for a 25 bps rate cut for September stand at 58%, down from 62% a day ago. In the meantime, the December 2024 fed funds futures contract implies the Fed will cut 36 bps toward the end of the year.

Daily digest market movers: Gold price rises amid high US yields and strong USD

US Dollar Index prints gains of 0.405, up at 105.64, a headwind for Gold prices.
US Treasury bond yields jumped, 10-year Treasury note yield is up more than four basis points to 4.257%.
US Initial Jobless Claims for the week ending June 15 rose to 238K, exceeding estimates of 235K but lower than the previous reading of 243K.
US Building Permits declined by 3.6% in May, dropping from 1.44 million to 1.386 million. Housing Starts for the same period fell by 5.5%, from 1.352 million to 1.277 million.
Fed officials counseled patience on interest rate cuts and emphasized they would remain data dependent. Although last week's CPI report was positive, policymakers reiterated they need to see more reports like May’s data.
Despite the US CPI report showing that the disinflation process continues, Fed Chair Jerome Powell commented that they remain “less confident” about the progress on inflation.

Technical analysis: Gold price challenges Head-and-Shoulders pattern, climbs past $2,350

Gold buyers are testing the Head-and-Shoulders pattern, dragging the golden metal above the pattern’s neckline. A daily close above the latter's confluence and the 50-day Simple Moving Averages (SMA) at around $2,343 could negate the bearish chart pattern and open the door for further gains.

In that event, Gold could extend its gains above $2,350, exposing additional key resistance levels. Next would be the June 7 cycle high of $2,387, ahead of challenging the $2,400 figure.

Conversely, if XAU/USD drops below $2,343, that would keep the Head-and-Shoulders chart pattern intact, and Gold could be headed to the downside. If XAU/USD slides drops below $2,300, the next support would be the May 3 low of $2,277, followed by the March 21 high of $2,222. Further losses lie underneath, with sellers eyeing the Head-and-Shoulders chart pattern objective from $2,170 to $2,160.

Inflation FAQs

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.

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