Gold price weakens further ahead of key US macro data

Source Fxstreet
Apr 24, 2024 11:07
  • Gold price eyes more downside amid caution ahead of US core PCE Price Index data.
  • Apart from the US underlying inflation data, investors will focus on Durable Goods Orders and Q1 GDP.
  • The US Dollar corrects as a weak PMI report for April dampens investors’ confidence in the strong US economic outlook.

Gold price (XAU/USD) retreats to $2,315 in Wednesday’s European session while attempting to extend recovery above $2,320. The near-term appeal of the precious metal remains weak as safe-haven demand wanes amid easing Middle East tensions. Also, investors turn cautious for bullions ahead of the United States Q1 Gross Domestic Product (GDP) release and the core Personal Consumption Expenditure Price Index (PCE) data for March, which will be published on Thursday and Friday, respectively.

The Q1 GDP and the underlying inflation will provide further cues about when the Federal Reserve (Fed) will begin reducing interest rates. The US core PCE Inflation, the Fed’s preferred inflation gauge, is estimated to have grown steadily by 0.3%, with annual figures softening to 2.6% from 2.8% recorded for February. The Gold price could face a sharp sell-off if the underlying inflation data comes in hotter than expected. 

US inflation indicators such as Consumer Price Index (CPI) and wage growth have remained high in the first quarter. Further signs of persisting price pressures would allow the Fed to continue with their argument of keeping interest rates at the current levels for a longer period. Historically, this scenario bodes well for the US Dollar and bond yields, and makes Gold less attractive.

Daily digest market movers: Gold price remains feeble amid multiple headwinds

  • Gold price remains on the back foot as safe-haven demand has diminished after investors shrug off Middle East fears amid no further escalation in tensions between Iran and Israel.
  • The precious metal got some relief after plunging to $2,300 as the US Dollar weakened after the release of the weak S&P Global preliminary PMI data for April. The report showed that surprisingly both Manufacturing and Services PMI were down from the prior readings. The Manufacturing PMI even fell below the 50.0 threshold, signalling a contraction. 
  • The US economic outlook from the agency was slightly gloomy, indicating the consequences of higher interest rates by the Federal Reserve. Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said: “The US economic upturn lost momentum at the start of the second quarter, with the flash PMI survey respondents reporting below-trend business activity growth in April. Further pace may be lost in the coming months, as April saw inflows of new business fall for the first time in six months and firms’ future output expectations slipped to a five-month low amid heightened concern about the outlook.” 
  • However, the near-term outlook of Gold is bearish as Fed policymakers see the current monetary policy framework as appropriate due to strong labor demand and persistent price pressures. The Gold price could turn sideways as investors shift focus to the US core PCE Price Index data for March, which will influence speculation about when the Fed will pivot to interest rate cuts. Currently, traders expect that the Fed will start reducing interest rates from the September meeting.
  • In Wednesday’s session, investors will focus on the Durable Goods Orders for March, which will be published at 12:30 GMT. In February, orders for Durable Goods rose sharply by 1.4%. Durable Goods are those goods that have a long life span and are a leading indicator of core CPI as it excludes prices of non-durable goods such as food and energy. Higher orders for Durable Goods indicate a strong demand by households, which allows factories to raise their prices at factory gates.

Technical Analysis: Gold price faces pressure near $2,320

Gold price struggles for a firm footing near $2,300. The precious metal remains on tenterhooks after sliding to near the 20-day Exponential Moving Average (EMA), which trades around $2,313. The yellow metal could fall to a three-week low near $2,265 amid multiple headwinds. A breakdown below the three-week low of $2,265 would expose the asset to March 21 high at $2,223.

The 14-period Relative Strength Index (RSI) falls below 60.00, suggesting that a bullish momentum has come to an end. However, the upside bias is intact until it sustains above 40.00.

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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