Gold falls yet clings to $2,400 despite US recession fears looming

Gold

FXStreetAug 5, 2024 8:13 PM

Gold dips to $2,364, a six-day low, then recovers above $2,400.
Market turmoil stems from weak US data, anticipates 50 bps Fed cut in September.
US Dollar Index falls 0.50% to 102.70; 10-year Treasury yield to 3.783%.
Rising Middle East tensions buoy Gold; US base in Iraq hit by missiles.

Gold price dropped over 1% during Monday’s North American session but recovered after hitting a new six-day low of $2,364 amid a worldwide market sell-off spurred by last week’s softer-than-expected data in the United States (US). The XAU/USD trades at $2,407, down 1.40%.

The financial markets began to price in a possible recession in the US. Traders expect the Federal Reserve (Fed) will cut interest rates by 50 basis points at the September meeting, following two “bad” reports that showed that manufacturing activity plunged, according to the Institute for Supply Management (ISM), while the economy added fewer people to the workforce.

This spooked investors, who found some relief following the ISM Services PMI release, which revealed the economy continues to expand at a healthier pace. After the data, Gold remained on the backfoot even though the Greenback remained on offer across the board.

The US Dollar Index (DXY), which tracks the performance of six currencies against the US Dollar, sinks 0.50% to 102.70.

US Treasury bond yields tanked further with the 10-year down one basis point to 3.783%. However, it still bounced off multi-week lows of 3.667% hit earlier in the session.

Rising tensions in the Middle East capped bullion losses as Israel awaits a response from Iran and Lebanon following the assassination of the Hamas leader earlier in the week. Sky News Arabia cited Iraqi sources when it revealed that a US base in Iraq was targeted by several missiles.

Daily digest market movers: Gold price stumbles amid recession fears

A deteriorated market mood would continue to influence traders as fears of a US recession ignited a sell-off among the largest stock market indices.
The Fed decided to hold rates unchanged last week but indicated that favorable data on inflation and further weakening in the labor market could prompt action.
Last week, dismal data in the US spooked investors, following the ISM Manufacturing PMI and Nonfarm Payrolls.
However, Chicago Fed President Austan Goolsbee said on Monday the Fed will not overreact to one month of data, and the board will remain committed to its dual mandate.
After the data, most banks began to price in more aggressive monetary policy easing by the Fed. Bank of America expects the first cut in September instead of December, while Citi and JP Morgan expect the Fed to lower rates by 50 bps in September and November.
The CME FedWatch tool shows the odds for a 50 bps Fed rate cut at the September meeting at 85%.

Technical analysis: Gold price tumbles but stays above $2,400

Gold price retreated to the 50-day Simple Moving Average (SMA) at $2,365 during the European session before bouncing off that level and clinched the $2,400 figure. Despite that recovery, momentum still favors sellers.

The Relative Strength Index (RSI) is about to turn bearish after falling steeply during the last three days and is about to cross below the RSI’s neutral line. Once surpassed, this could accelerate Bullion’s losses.

If XAU/USD dives below $2,400, the 50-day SMA could be challenged. Once surpassed, the next support would be the 100-day SMA at $2,340, followed by the May 3 low of $2,277.

Conversely, if buyers reclaim $2,450, the next resistance would be the August 2 peak at $2,477. A breach of the latter will expose the all-time high at $2,483 ahead of $2,500.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

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.

How often does the Fed hold monetary policy meetings?

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.

What is Quantitative Easing (QE) and how does it impact USD?

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.

What is Quantitative Tightening (QT) and how does it impact 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.

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