- Gold hit yet another historic peak following a short-lasting correction.
- XAU/USD ignores rising US yields and broad USD strength.
- The technical outlook shows that Gold remains extremely overbought.
Gold price (XAU/USD) looked like it was on the verge of a deep correction on Wednesday but it gathered bullish momentum in the second half of the week, advancing to a fresh all-time high above $2,400. In the absence of high-tier data releases from the US, growth data from China and geopolitical developments could impact Gold’s valuation next week.
Gold started the new week on a bullish note and closed the first two trading days of the week in positive territory. As the trading action remained relatively subdued ahead of the key inflation data from the US, however, XAU/USD’s gains remained limited.
The US Bureau of Labor Statistics (BLS) reported on Wednesday that annual inflation, as measured by the change in the Consumer Price Index (CPI), rose to 3.5% in March from 3.2% in February. This reading came in above the market expectation of 3.4%. Details of the report showed that the CPI and the core CPI, which excludes volatile food and energy prices, both increased 0.4% on a monthly basis. The benchmark 10-year US Treasury bond yield surged to its highest level since mid-November above 4.5% and the USD Index climbed to five-month tops above 105.00 after inflation readings, triggering a downward correction in Gold.
The probability of the Federal Reserve (Fed) leaving the policy rate unchanged in June jumped to nearly 80% from 40% before the CPI data release, according to the CME FedWatch Tool. In turn, XAU/USD fell nearly 1% and registered daily losses on Wednesday, just for the second day in the last two weeks.
Although the USD preserved its strength on Thursday, escalating geopolitical tensions allowed Gold to regather bullish momentum. Iran has promised to retaliate, blaming Israel for the attack on its consulate in Syria earlier in the month and reviving fears over a deepening conflict in the Middle East.
The European Central Bank (ECB) maintained its key rates after the April policy meeting on Thursday. Citing three sources, Reuters reported that on Thursday that ECB policymakers were on track to lower the policy rate in June. The sharp upsurge seen in the XAU/EUR pair showed that Gold captured capital outflows out of the Euro. The pair trades at a record high above €2,200 and it’s up about 9% in April after gaining nearly 10% in March.
As markets sought refuge ahead of the weekend, Gold continued to push higher and rose above $2,400. In addition to risk-aversion, central bank buying is thought to be another driver behind Gold’s unprecedented rally. “The fundamentals underpinning the current rally include growing geopolitical risk, steady central bank buying and resilient demand for jewelry and bars and coins,” World Gold Council said in its monthly report published earlier this week.
Retail Sales for March will be the only noteworthy data featured in the US economic calendar next week. On a monthly basis, Retail Sales are forecast to rise 0.3% following the 0.6% increase recorded in February. In case there is a negative print, the immediate reaction could cause the USD to weaken slightly.
In the Asian session on Tuesday, Gross Domestic Product (GDP) data for the first quarter from China will be watched closely by market participants. The Chinese economy is forecast to grow at an annual rate of 5%, down from the 5.2% expansion registered in the fourth quarter of 2023. A disappointing GDP print from China, the world’s biggest consumer of Gold, could cause concerns over the yellow metal’s demand outlook and limit XAU/USD’s upside in the short term.
Meanwhile, investors will remain focused on geopolitical developments. A de-escalation of the conflict in the Middle East could trigger a deep correction in Gold. On the other hand, XAU/USD is likely to continue to find support in a risk-averse market environment, even if the USD continues to outperform its rivals on growing expectations for a delay in the Fed policy pivot.
Gold remains extremely overbought, with the Relative Strength Index (RSI) indicator on the daily chart holding well above 70. This week’s action, however, reaffirmed that investors have been paying little to no attention to technical developments. It’s not an easy task to set up bullish targets for Gold, given that it continues to trade in uncharted territory. In case the precious metal stabilizes above $2,400 and confirms that level as support, buyers could have confidence for another leg higher toward the next psychological level at $2,500.
On the downside, interim support is located at $2,360 (static level, former resistance) before $2,320 (April 10 low) and $2,300 (psychological level, static level).
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
