- Gold price drops as investors see no immediate escalation in Israel-Iran tensions.
- Fizzling Fed rate cut prospects combined with easing geopolitical fears weigh on Gold.
- Fed’s Goolsbee said progress in taming inflation has stalled.
Gold price (XAU/USD) dips vertically after failing to recapture the crucial resistance of $2,400 in Monday’s early American session, driven by less safe-haven demand as Middle East tensions ease.
No further escalation in tensions between Iran and Israel has provided some relief to dismal market sentiment. Also, markets are increasingly pricing out the possibility that the Federal Reserve (Fed) will lower interest rates in the June and July meetings, further weighing on Gold.
10-year US Treasury yields rise to 4.66%. Yields on interest-bearish assets such as US bonds rise on firm prospects that the Fed could be a laggard in pivoting to rate cuts compared with other central banks from developed nations. Higher bond yields, in turn, weigh on non-yielding assets such as Gold as they become a less-attractive alternative to invest in.
This week, the United States core Personal Consumption Expenditure Price Index (PCE) data for March will likely move bond yields and Gold prices. As the Fed’s preferred inflation gauge, PCE data could shift expectations of when the US central bank will start lowering interest rates. According to the CME FedWatch tool, markets currently expect the Fed to make the move at its September meeting.
Meanwhile, the US Dollar Index (DXY), which tracks the US Dollar’s value against six major currencies, consolidates in a tight range around 106.00. Gold is a dollar-denominated asset, so a firm US Dollar tends to keep its price under control.
Going forward, investors will focus on the preliminary Q1 Gross Domestic Product (GDP) data, which will be published on Thursday. The US economy is estimated to have expanded by 2.5%. Strong growth exhibits robust consumer spending and higher production, which translates into higher price pressures. Higher GDP numbers would allow the Fed to keep interest rates at the current high levels, which will eventually improve the US Dollar’s demand.
- Gold price tumbles to $2,330 after refreshing all-time highs near $2,430 as safe-haven demand diminishes. Investors are less worried about further escalation in Middle East tensions. On Friday, Tehran’s air defence said it destroyed a limited drone attack by Israel and confirmed no harm to nuclear facilities in the central region of Isfahan. Iran didn’t announce any plan for an immediate retaliation, so investors see no major escalation in the short term even as tensions between both parties persist.
- The precious metal comes under pressure after five weeks of gains as risk sentiment improves. The appeal for Gold has remained buoyant despite fading expectations that the Fed will reduce interest rates in June. Prospects for rate cuts in the June and July meetings have waned after the inflation report for March turned out hotter than expected.
- The recent inflation data have dented Fed policymakers’ confidence in inflation declining to the 2% target, with many of them saying they want to maintain interest rates higher for a longer period. On Friday, Chicago Fed Bank President Austan Goolsbee said: “Given the strength of the labor market and progress on easing inflation seen over a longer arc, I believe the Fed’s current restrictive monetary policy is appropriate,” Reuters reported.
- Goolsbee said that hotter-than-expected inflation data for the first three months of the year “can’t be dismissed.” He advised the Fed will need to determine if continued strong growth in the economy and job market is a sign of overheating.
Gold price plunges to near $2,330 after retreating from $2,418. A mean-reversion move is anticipated in the yellow metal, which will drag it to the 20-day Exponential Moving Average (EMA) at around $2,315. Usually, the asset reverses to the 20-day EMA after a sharp rally. However, the move is generally considered a correction, not a bearish reversal.
On the downside, April 5 low near $2,268 and March 21 high at $2,223 will be major support areas.
The 14-period Relative Strength Index (RSI) cools down to 64.40 after turning extremely overbought. The overall outlook for the asset remains strong if the RSI shifts into the bullish range of 60.00-80.00.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.