Gold price turns sideways as Fed Powell hawkish guidance limits upside

Source Fxstreet
Apr 17, 2024 09:15
  • Gold price struggles for a direction as the Fed’s “higher for longer” interest-rates stance offsets safe-haven demand.
  • Fed Powell supports keeping interest rates at high levels until there is confidence that inflation will ease to 2%.
  • The US warns about sanctions on Iran in response to their attack on Israel.

Gold price (XAU/USD) balances below $2,400 in Wednesday’s European session. The precious metal struggles to recapture new all-time highs around $2,430 as Federal Reserve (Fed) Chair Jerome Powell emphasised maintaining the restrictive policy framework for a longer period. Powell and his colleagues seem to be leaning towards keeping interest rates higher for longer as inflation has remained stubborn and the labor demand remained strong.

The prospects for the Fed keeping interest rates higher for longer bodes well for the US Dollar and US bond yields. 10-year US Treasury yields fell slightly but remained close to a five-month high around 4.70%. The US Dollar Index (DXY), which measures the Greenback’s value against six major currencies, turns sideways after refreshing a five-month high near 106.40.

Meanwhile, deepening Middle East tensions hold strong ground for Gold. Israel prepares to respond to Iran’s attack. However, US President Joe Biden said it won’t support the counterattack from Israel. US Treasury Secretary Janet Yellen said on Tuesday that the US administration intends to levy new sanctions on Iran after its attack on Israel. Fresh sanctions on Iran could impact their capacity to export Oil.

Daily digest market movers: Gold price struggles for direction

  • Gold price trades below the crucial resistance of $2,400. The precious metal consolidates as a hawkish interest rate outlook from Federal Reserve Chair Jerome Powell has limited the upside while escalating Middle East tensions continue to offer firm ground.
  • On Tuesday, Jerome Powell supported keeping interest rates higher for a longer period as current inflation data is not giving confidence that price pressures will return to the desired rate of 2%. “The recent data have clearly not given us greater confidence, and instead indicate that it’s likely to take longer than expected to achieve that confidence,” Powell said, according to Reuters.
  • Powell added that strong labor demand and slowing disinflation progress in the first three months of this year suggest that the restrictive monetary policy framework should be given more time to work to bring inflation down to 2%.
  • The Fed’s confidence in progress in inflation easing to the required rate of 2% was questioned after the March Consumer Price Index (CPI) data surprisingly rose more than estimated. Also, robust Retail Sales data for March have reinforced expectations that the inflation outlook will remain stubborn.
  • On the geopolitical front, escalating Middle East tensions keep the safe-haven bid firm. Fears of Middle East tensions spreading beyond Gaza have escalated as Israel prepares to retaliate for the airstrike by Iran on their territory on Saturday. Iran aimed hundreds of drones and missiles at Israel in response to their attack on the Iranian embassy near Damascus in Syria, in which two high-ranked generals were killed. The appeal for Gold as a safe-haven asset strengthens when investors see geopolitical tensions worsening further.
  • Meanwhile, Fed policymakers are lined up to provide fresh guidance on interest rates this week. Policymakers are expected to maintain the argument that interest rates need to remain higher for long enough until they get evidence that inflation will sustainably return to the desired rate of 2%.

Technical Analysis: Gold price trades below $2,400

Gold price trades sideways inside Tuesday’s trading range around $2,380. The upside in the precious metal remains limited as momentum oscillators are cooling down after turning extremely overbought. The 14-period Relative Strength Index (RSI) on the daily chart drops slightly after peaking around 85.00. however, the broader-term demand is intact as the RSI remains in the bullish range of 60.00-80.00. 

On the downside, April 5 low near $2,268 and March 21 high at $2,223 will be major support areas.

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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