- Gold price advances to a fresh record peak amid rising bets for a June Fed rate cut.
- The risk-on mood and a modest USD uptick do little to hinder the strong move up.
- The overbought RSI on the daily chart warrants some caution for aggressive bulls.
Gold price (XAU/USD) enters a bullish consolidation phase during the early European session and oscillates in a narrow band around the $2,260$2,265 region, or a fresh record high touched this Monday. Investors now seem convinced that the Federal Reserve (Fed) will start cutting rates in June and the bets were reaffirmed by the US Personal Consumption Expenditures (PCE) Price Index on Friday. This, along with geopolitical risks stemming from the protracted Russia-Ukraine war and the recent conflicts in the Middle East, lend additional support to the safe-haven precious metal.
Meanwhile, data released on Sunday showed that China’s manufacturing activity expanded for the first time in six months in March and boosted investors’ confidence. This remains supportive of the prevalent risk-on environment and holds back bulls from placing fresh bets around the Gold price amid overstretched conditions on the daily chart. Apart from this, the emergence of some US Dollar (USD) buying contributes to capping gains for the commodity, though the aforementioned fundamental backdrop suggests that the path of least resistance for the XAU/USD remains to the upside.
- The crucial US inflation data released on Friday keeps the door open for a June interest rate cut from the Federal Reserve and continues to drive flows towards the non-yielding Gold price.
- The US Bureau of Economic Analysis reported on Friday that the Personal Consumption Expenditures (PCE) Price Index rose 0.3% in February, and the yearly rate edged up to 2.5% from 2.4%.
- Excluding volatile food and energy prices, the core PCE Price Index – the Fed’s preferred inflation gauge – rose by the 2.8% YoY rate as compared to January’s upwardly revised reading of 2.9%.
- Following the release, Fed Chair Jerome Powell noted that the latest US inflation data is along the lines of what we would like to see, reaffirming bets for an imminent shift in the Fed’s policy stance.
- According to the CME Group’s FedWatch Tool, market participants are now pricing in around a 70% probability that the Fed will begin its rate-cutting cycle at the June monetary policy meeting.
- Russia escalates attacks on Ukraine’s energy and other infrastructure in response to the recent Ukrainian long-range drone strikes on oil industry assets deep inside its territory.
- Hamas says the Israeli military is committing a war crime by establishing so-called kill zones across the Gaza Strip where any approaching Palestinian may be shot and killed.
- The global risk sentiment gets a boost from upbeat Chinese data released on Sunday, showing that business activity in the manufacturing sector expanded for the first time in six months.
- This, along with a modest US Dollar uptick, might cap gains for the safe-haven precious metal as traders now look to the US ISM Manufacturing PMI for short-term impetus.
From a technical perspective, last week’s sustained breakout through the $2,200 mark and a subsequent strength beyond the previous record high, around the $2,223 area, was seen as a fresh trigger for bulls. This, in turn, validates the near-term positive outlook and suggests that the path of least resistance for the Gold price is to the upside. That said, the Relative Strength Index (RSI) on the daily chart is flashing overbought conditions. This makes it prudent to wait for some near-term consolidation or a modest pullback before positioning for any further appreciating move.
Nevertheless, the Gold price seems poised to climb further towards claiming the $2,300 round-figure mark. Meanwhile, any corrective pullback is more likely to attract fresh buyers near the $2,223 region. This should help limit the downside for the XAU/USD near the $2,200 mark, which should now act as a key pivotal point. A convincing break below the latter might prompt some technical selling and pave the way for some meaningful downfall in the near term.
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.
