- Gold price lacks follow-through buying and is influenced by a combination of diverging forces.
- Easing geopolitical tensions continues to undermine demand for the safe-haven precious metal.
- Tuesday’s dismal US PMIs weigh on the USD and lend support ahead of the key US macro data.
Gold price (XAU/USD) edges higher during the Asian session on Wednesday and looks to build on the previous day’s bounce from over a two-week low – levels just below the $2,300 mark. Tuesday’s disappointing release of the US PMIs suggested that the economic upturn lost momentum at the start of the second quarter and keep the US Dollar (USD) depressed near its lowest level in over a week. This, in turn, is seen as a key factor lending some support to the commodity, though expectations that the Federal Reserve (Fed) will keep interest rates higher for longer could act as a headwind.
Investors now seem convinced that the US central bank will not begin its rate-cutting cycle until September in the wake of still sticky inflation. This remains supportive of elevated US Treasury bond yields and favors the USD bulls. Apart from this, a positive risk tone, bolstered by easing geopolitical tensions in the Middle East, might contribute to capping gains for the safe-haven Gold price. Traders might also refrain from placing aggressive directional bets and prefer to wait for the key US macro data – the Advance Q1 GDP report and the Personal Consumption Expenditures (PCE) Price Index.
Daily Digest Market Movers: Gold price draws some support from softer USD, upside seems limited amid hawkish Fed expectations
- Easing concerns over geopolitical tensions in the Middle East remain supportive of a generally positive risk tone and continue to act as a headwind for the safe-haven Gold price.
- Hawkish comments from Federal Reserve officials lifted bets that the US central bank will keep rates higher for longer and further undermined the non-yielding yellow metal.
- The weaker US PMI prints released on Tuesday keep the US Dollar bulls on the defensive near a one-and-half-week low, which is seen lending some support to the commodity.
- The S&P Global Composite Purchasing Managers Index (PMI) fell to 50.9 in April’s flash estimate, suggesting that the business activity in the US private sector expanded at a slower pace.
- Meanwhile, the S&P Global Manufacturing PMI unexpectedly dropped into the contraction territory in April, while the gauge for the services sector declined to 50.9 from 51.7 in March.
- Traders also prefer to wait on the sidelines ahead of this week’s key US macro data, which might influence the Fed’s future policy decision and provide a fresh impetus to the XAU/USD.
- Wednesday’s US economic docket features Durable Goods Orders, though the focus remains on the Advance Q1 GDP report and the Personal Consumption Expenditures (PCE) Price Index.
Technical Analysis: Gold price might struggle to attract any meaningful buyers, $2,300 holds the key for bullish traders
From a technical perspective, the XAU/USD showed some resilience below the 23.6% Fibonacci retracement level of the February-April rally. The subsequent bounce, along with the fact that oscillators on the daily chart are still holding in the positive territory, warrants some caution for bearish traders. Hence, it will be prudent to wait for acceptance below the $2,300 mark before positioning for deeper losses. The Gold price might then slide to the $2,260-2,255 area, or the 38.2% Fibo. level, en route to the $2,225 intermediate support and the $2,200-2,190 confluence, comprising the 50% Fibo. level and the 50-day Simple Moving Average (SMA).
On the flip side, any further move up is more likely to confront stiff resistance and remain capped near the $2,350-2,355 region. The next relevant hurdle is pegged near the $2,380 supply zone, which is followed by the $2,400 mark and the all-time peak, near the $2,431-2,432 area. A sustained strength beyond the latter will be seen as a fresh trigger for bullish traders and set the stage for an extension of the recent blowout rally witnessed over the past two months or so.
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.