Gold scales higher on softer US yields as traders await Fed Chair Warsh's speech
- Gold regains positive traction as the US Treasury’s buyback strategy keeps US bond yields depressed.
- The US inflation data fuels Fed rate hike bets, which support the USD and might cap the commodity.
- Traders also opt to wait for Fed Chair Kevin Warsh’s speech on Friday for cues about the policy path.
Gold (XAU/USD) catches fresh bids during the Asian session on Thursday, reversing a major part of the previous day's losses to the $4,583 region, or the weekly low. The precious metal, however, remains below its highest level since May 14, touched on Tuesday, as traders await US Federal Reserve (Fed) Chair Kevin Warsh's speech at the Jackson Hole Symposium on Friday for cues about the future policy path. The outlook, in turn, will play a key role in influencing the US Dollar (USD) price dynamics and provide some meaningful impetus to the non-yielding bullion.
In the meantime, the slightly hot US inflation data released on Wednesday backed the case for at least one Fed rate hike by the end of this year. In fact, data published by the Commerce Department showed that the US Personal Consumption Expenditures (PCE) Price Index remained unchanged at 3.7% in the 12 months through July, coming in higher than expectations. Adding to this, the core gauge, which excludes volatile food and energy prices, held steady at 3.3%, as anticipated. This points to still-sticky inflation and is likely to intensify the debate over whether interest rates should be lifted or held steady.
Despite hawkish Fed expectations, US bond yields remain depressed on the back of the US Treasury's buyback strategy. Adding to this, the latest optimism over a potential US-Iran peace deal and the reopening of the Strait of Hormuz cap the upside for the USD and offer some support to gold. In fact, media reports suggest that the US and Iran have reached a new ceasefire deal that would be announced in the coming days. Furthermore, Iran’s Deputy Foreign Minister Kazem Gharibabadi said on Tuesday that Tehran and Oman have agreed on a temporary maritime route for ships travelling through the waterway.
Gharibabadi, however, warned that the Strait will not fully reopen until the US fulfills its commitments under an interim peace deal signed in June, keeping the geopolitical risk premium in play. This, in turn, acts as a tailwind for crude oil prices and the safe-haven Greenback, which might keep a lid on the gold price. Hence, it will be prudent to wait for strong follow-through buying and a sustained move beyond the $4,700 mark before positioning for the resumption of the XAU/USD pair's upward trajectory witnessed since the beginning of this month.
XAU/USD daily chart
Technical Analysis
The precious metal holds a bullish near-term bias above the $4,525-$4,515 confluence – comprising the 200-day Simple Moving Average (SMA) and the 38.2% Fibonacci retracement of the March-June decline. Meanwhile, the Relative Strength Index (RSI) at 68.21 hovers near overbought territory, while the Moving Average Convergence Divergence (MACD) stays in positive territory. These indicators together suggest that upside momentum is still constructive but increasingly stretched.
Hence, it will be prudent to wait for a move beyond the 50% retracement level and the $4,700 mark before positioning for further gains. The subsequent move up could lift the Gold price to the 61.8% level at $4,861.14. Further north, the 78.6% retracement at $5,107.11 and the cycle high region near $5,420.42 form a broader bullish objective if buyers extend the advance. On the flip side, the $4,525-$4,515 confluence might continue to protect the immediate downside. A deeper pullback would expose the 23.6% level at $4,301.87 before the structural floor around the cycle low at $3,956.35.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Fed FAQs
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.
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.
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.
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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