Gold price reaches fresh high at $2,300 on weak US Dollar

Source Fxstreet
Apr 4, 2024 10:45
  • Gold price tests the $2,300 region as the US Dollar extends its correction.
  • Weak US Services PMI report voiced concerns over the economic outlook.
  • US yields rise as Fed rate cut expectations for June ease further.

Gold price (XAU/USD) is slightly down after securing another fresh record high above $2,300 in Thursday’s European session. The precious metal has benefitted from the soft US Dollar, knocked down after the United States Institute for Supply Management (ISM) delivered a weak Services PMI report for March.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, extends its downside to 104.00. 

10-year US Treasury yields are slightly up at 4.36% as market expectations for the Federal Reserve (Fed) starting to unwind its higher interest rate stance in the June meeting have eased. The CME FedWatch tool shows that traders are pricing in a 58% chance that the Fed will trim interest rates in June, down from 70% a week ago. Non-yielding assets such as Gold tend to face liquidity outflows when the demand for interest-bearing assets, such as US bonds, strengthens. However, this hasn’t been the case recently for Gold, which has been edging higher for several trading sessions even as yields also held up.

Meanwhile, investors await the release of the US Nonfarm Payrolls (NFP) report for March, which will be published on Friday. The US NFP report is expected to show US employers added 200K fresh payrolls over the month, lower than the former reading of 275K. The Unemployment Rate is anticipated to remain steady at 3.9%. Average Hourly Earnings, which gauge wage growth and provide significant guidance on the inflation outlook, are expected to rise at a slower pace of 4.1% from 4.3% in February on a year-on-year basis. 

Robust wage growth and labor demand could further dampen Fed rate cut expectations for June, while easing labor market conditions could boost rate cut hopes. This last scenario would likely have a negative impact on US yields and likely help Gold edge further up. 

Daily digest market movers: Gold price rises despite upbeat US bond yields

  • Gold price rallies above the round-level figure of $2,300, supported by weakness in the US Dollar. The US Dollar faces an intense sell-off as poor United States ISM Services PMI for March deepened uncertainty over the interest rate outlook.
  • Fed policymakers have been reiterating that there is no urgency for rate cuts as they lack confidence that inflation will sustainably return to the desired rate of 2%. The strong US economic outlook and tight labor market conditions are keeping inflation pressures high. However, the weak US Services PMI report has cast some doubts over the US economy's resilience.
  • The Services PMI surprisingly fell to 51.4 in March, missing expectations of 52.7 and below the former reading of 52.6. Subindexes such as New Orders and Prices Paid also fell sharply. The Services PMI gauges business activity in the service sector, which accounts for two-thirds of the US economy. A sharp decline in the Prices Paid measure indicates easing price pressures, while the decline in the New Orders index suggests slowing demand.
  • Market expectations for the Fed pivoting to rate cuts in the June meeting have eased after Atlanta Fed President Raphael Bostic delivered hawkish guidance and Fed Chairman Jerome Powell reiterated the need for more data before pivoting to rate cuts.
  • On Wednesday, Raphael Bostic said on CNBC he sees the central bank reducing interest rates only once in the last quarter this year. Bostic expects inflation to return to the 2% target in 2026. He added: "The economy is maintaining the strong momentum it has had."
  • Jerome Powell maintained the baseline that rate cuts will start later this year only when policymakers have greater confidence that inflation is moving sustainably down. "Recent readings on both job gains and inflation have come in higher than expected," he said.

Technical Analysis: Gold price kisses $2,300

Gold price is consistently refreshing its lifetime highs supported by multiple tailwinds. The precious metal tests the round-level figure of $2,300. However, it struggles to continue its winning streak for the seventh trading session on Thursday. 

Extremely overbought momentum oscillators are encouraging expectations for a slight correction. The 14-period Relative Strength Index (RSI) hovers near 80.00.

The near-term demand is strong, as the RSI has been consistently oscillating in the bullish range of 60.00-80.00 for more than a month.

All short-to-long-term Exponential Moving Averages (EMAs) are sloping higher, also suggesting strong near-term demand. On the downside, the March 21 high at $2,223 is the major support area.

Gold FAQs

Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.

Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.

Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.

The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.

 

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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