Gold falters below resistance as US dollar rises
13/07/2024
- Gold is trading in a horizontal range, with the US dollar supported by fragile market sentiment.
- US yields remain low on hopes that the Fed will signal a dovish shift on Wednesday.
- XAU/USD needs to break the $2,400 resistance to clear the broader bearish structure.
Gold (XAU/USD) traded in a tight range in the European session on Monday, after finding resistance near $2,400 earlier. Reports that the Middle East conflict could spill over into Lebanon are keeping investors on edge and providing a competitive edge for the safe-haven USD.
Geopolitical risks are overshadowing the main event of the week, the Federal Reserve (Fed) meeting, scheduled for Wednesday. The June PCE price index, as seen on Friday, showed inflation remaining tight, albeit close to the central bank’s 2% target. Investors continue to hope that the easing cycle will begin in September and that the Fed could give hints in that direction after this week’s meeting.
On Tuesday, June US JOLTs jobless data and the Conference Board’s July consumer confidence index are expected to show moderate weakening, adding to the case for a September rate cut.
Market Drivers Daily Recap: Gold Buyers Hesitate as Fundamental Picture Blurs
Growing geopolitical concerns, with Israel mulling an attack on Lebanon, are fueling the safe-haven U.S. dollar and weighing on gold.
U.S. 10-year Treasury yields are falling on rising hopes that the Fed will begin cutting rates in September.
CME Group’s Fed Watch tool estimates a 95% chance that the Fed will keep rates unchanged on Wednesday and a 100% chance of rate cuts in September.
On Tuesday, the Conference Board is expected to show that its consumer confidence index fell to 99.5 from 100.4 the previous month.
Also on Tuesday, U.S. job openings (JOLTS Job Openings) are forecast to decline to 8.03 million in June, from 8.14 million vacancies in May.
Technical Analysis: XAU/USD is capped below $2,400 with immediate uptrend intact
XAU/USD’s recovery from last week’s lows around $2,350 has been capped at $2,400. This is a major resistance area as the 100-period simple moving average (SMA) on the 4-hour chart faces downtrend resistance from the July 17 highs at that level, but downside attempts remain limited for now.
The intraday RSI shows moderate positive momentum, with the $2,380 level holding the bears for now. Below, the next target is the July 25 low at $2,350. On the upside, a confirmation above $2,400 would negate the broader bearish structure and bring $2,430 into focus.
Frequently Asked Questions About Gold
Gold has played a key role in human history, as it has been widely used as a store of value and a medium of exchange. Today, aside from its luster and use in jewelry, the precious metal is widely considered a safe haven, meaning it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and currency depreciation, as it is not dependent on any specific issuer or government.
Central banks are the largest holders of gold. In their quest 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 currency. High gold reserves can be a source of confidence in a country's solvency. Central banks added 1,136 tonnes of gold worth about $70 billion to their reserves in 2022, according to data from the World Gold Council. That's the largest annual purchase since records began. Central banks in emerging economies such as China, India and Turkey are rapidly increasing their gold reserves.
Gold has an inverse correlation with the U.S. dollar and U.S. Treasuries, both of which are important reserves and safe havens. When the dollar depreciates, gold tends to rise, allowing investors and central banks to diversify their holdings in turbulent times. Gold is also inversely correlated with risky assets. A rally in the stock market tends to weaken the price of gold, 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 drive up the price of gold due to its safe-haven status. As a non-yielding asset, gold tends to rise with lower interest rates, while a higher cost of money usually weighs on the yellow metal. However, most movements depend on how the US dollar (USD) performs since the asset is priced in dollars (XAU/USD). A strong dollar tends to keep the price of gold in check, while a weaker dollar is likely to push gold prices higher.
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