Gold price climbs on soft US Retail Sales, igniting rate cut hopes

Source Fxstreet
Jun 18, 2024 19:31
  • Gold gains as softer-than-expected US Retail Sales boost rate cut expectations.
  • Fed officials' comments reveal mixed views on the timing of potential rate cuts.
  • 10-year Treasury yield drops six basis points to 4.219%, reflecting market speculation on future rate cuts.

Gold prices rose on Tuesday after economic data from the United States (US) hinted that consumer spending is constraining due to a softer-than-estimated Retail Sales report. This fueled speculation that the Federal Reserve (Fed) could begin its easing cycle this year. The XAU/USD trades at $2,327, up 0.51%.

The US Department of Commerce revealed that May’s Retail Sales improved compared to April’s data, which was downwardly revised but missed the mark. That data reignited investors' rate cut hopes as the Fed signaled in the last meeting that current monetary policy is appropriate.

Other data showed that Industrial Production improved in May, followed by a downward revision in April.

Aside from economic data, Fed officials have crossed the newswires. New York Fed President John Williams said that interest rates would decrease gradually if the disinflation process continued to evolve toward the Fed’s 2% annual core inflation goal. Despite dodging a question about a rate cut in September, he added, “I think that things are moving in the right direction.”

Richmond Fed President Thomas Barkin was cautious, saying he needs to see more data before easing. Later, Boston Fed President Susan Collins said she isn’t carried away about just one good reading on inflation and added that it’s not time to cut rates.

The newly named St. Louis Fed President, Alberto Musalem, stated that he needs to see an evolution in the disinflation process before voting to cut rates. He added that if inflation halts, he favors a rate hike, though it’s not his base case scenario.

Even though most policymakers struck a neutral stance, US Treasury yields reflect investors beginning to price in rate cuts. The 10-year Treasury note yield is down six basis points at 4.219%.

Data from the Chicago Board of Trade (CBOT) shows traders expect 36 bps of easing during the year via December’s 2024 fed funds rate contract.

Daily digest market movers: Gold price jumps as US yields drop

  • US Dollar Index (DXY) decreased by 0.05% to 105.27, putting a lid on Gold prices.
  • US Retail Sales for May increased by 0.1% MoM, improving from April's 0.2% decline but falling short of the 0.2% estimate. On an annual basis, sales decreased from 2.7% to 2.3%.
  • US Industrial Production in May surpassed expectations of a 0.3% increase, rising by 0.9% MoM.
  • Last week's CPI report raised the odds of a Fed rate cut in September from 57% to 62%, according to the CME FedWatch Tool.
  • Despite the US CPI report showing that the disinflation process continues, Fed Chair Jerome Powell commented that they remain “less confident” about the progress on inflation.

Technical analysis: Gold price remains bearishly biased despite rising

Gold price is neutral to downwardly biased as the bearish Head-and-Shoulders chart pattern remains in play. Although the yellow metal achieved a leg up in the near term, momentum favors sellers, which can be seen by the Relative Strength Index (RSI).

If XAU/USD drops below $2,300, the next support would be the May 3 low of $2,277, followed by the March 21 high of $2,222. Further losses lie beneath as sellers would eye the Head-and-Shoulders chart pattern objective from $2,170 to $2,160.

Conversely, if Gold extends its gains past $2,350, key resistance levels emerge like the June 7 cycle high of $2,387, ahead of challenging the $2,400 figure.

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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