Gold price bounces back amid US yields decline as Fed could deliver two rate cuts

Source Fxstreet
Jun 24, 2024 09:55
  • Gold price rebounds from $2,315 as US bond yields come under pressure on Monday.
  • Investors see the Fed reducing interest rates twice this year.
  • The US economic outlook improved as preliminary PMI expanded at a faster pace in June.

Gold price (XAU/USD) attracts bids near $2,315 in Monday’s European session as US bond yields edge down amid firm speculation that the Federal Reserve (Fed) will deliver two rate cuts this year. Expectations for the Fed to reduce interest rates twice in 2024 strengthened amid easing inflationary pressures in the United States (US). The 10-year US Treasury yields drop to near 4.25% on Monday.

The US Consumer Price Index (CPI) report showed that price pressures decelerated more than expected in May. Also, the preliminary S&P Global Purchasing Managers Indes (PMI) report for June showed signs of moderate cooling in cost growth. “Selling price inflation cooled to a five-month low in June. The rate of increase nevertheless fell to a five-month low in the services sector, where the rise was among the lowest seen over the past four years, and a six-month low in manufacturing,” the report said.

The CME FedWatch tool suggests that the central bank will start the policy-easing campaign at the September meeting and deliver subsequent rate cuts in November or December. The 30-day Federal Funds futures pricing data indicate that the probability of a rate cut in September is 66%.

On the contrary, according to the dot plot chart at the June FOMC economic projections, Fed policymakers expect that interest rates will be cut only once this year. Officials want to see inflation declining for months before pivoting to the policy-normalization process.

Daily digest market movers: Gold price rebounds while US bond yields ease

  • Gold’s price finds buying interest near $2,315 after a sharp decline on Friday. The precious metal faced an intense sell-off as the US Dollar (USD) rose after the preliminary S&P Global PMI report for June showed that economic activity unexpectedly expanded at a faster pace. The surprisingly upbeat US PMI report prompted an upside in the US Dollar, making Gold an expensive bet for currency holders.
  • The report showed that the Composite PMI surprisingly jumped to 51.7. Investors expected the PMI data to decline to 51.0 from the prior release of 51.3. Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, commented, “The PMI is running at a level broadly consistent with the economy growing at an annualized rate of just under 2.5%. The upturn is broad-based, as rising demand continues to filter through the economy. Although led by the service sector, reflecting strong domestic spending, the expansion is being supported by an ongoing recovery in manufacturing, which so far this year is enjoying its best growth spell for two years.”
  • This week, investors will keenly focus on the revised Q1 Gross Domestic Product (GDP) data and the core Personal Consumption Expenditure price index (PCE) for May. The core PCE price index data is the Fed’s preferred inflation measure, which will provide fresh cues on when and how much the central bank will reduce interest rates this year.
  • On the global front, the security pact between Russian President Vladimir Putin and North Korean leader Kim Jong-un in Pyongyang has raised the risk of further escalating geopolitical tensions. In a wide-ranging treaty spanning political, trade, investment, and security cooperation, North Korea and Russia pledged to use all available means to provide immediate military assistance in the event the other is attacked, CNN reported. Mounting global tensions could limit the downside of the Gold price.

Technical Analysis: Gold price ranges for more than two months

Gold price consolidates between $2,277-$2,450 for more than two months. The 50-day Exponential Moving Average (EMA) near $2,318 continues to provide support to the Gold price bulls. The 14-day Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, indicating indecisiveness among market participants. 

The precious metal could come under pressure if the Gold price breaks below the May 3 low around $2,277. A downside move could expose the March 21 high at $2,223. On the contrary, the Gold price could enter an unchartered trajectory if it breaks above the May 20 high of $2,450.

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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