- Gold price pulls back from the vicinity of the monthly peak retested earlier this Tuesday.
- Bulls opt to lighten their bets amid a positive risk tone and ahead of the US inflation data.
- Geopolitical risks and bets for a 50-bps rate cut by the Fed should help limit the downside.
Gold price (XAU/USD) attracts some sellers following an Asian session uptick back closer to the monthly peak and erodes a part of the previous day's strong gains of more than 1%. A generally positive tone around the equity markets turns out to be a key factor undermining demand for the safe-haven precious metal. Bulls further opt to lighten their bets ahead of the release of the key US inflation figures – the Producer Price Index (PPI) and the Consumer Price Index (CPI) on Tuesday and Wednesday, respectively.
The downside for the Gold price, however, seems limited in the wake of geopolitical risks stemming from the ongoing conflicts in the Middle East. Furthermore, the protracted Russia-Ukraine war should keep a lid on the market optimism. Meanwhile, expectations for bigger interest rate cuts by the Federal Reserve (Fed) keep the US Dollar (USD) bulls on the defensive and should limit losses for the commodity. Hence, any further decline could be seen as a buying opportunity and is likely to remain cushioned.
Daily Digest Market Movers: Gold price bulls turn cautious amid positive risk tone, downside seems limited
- Israel stepped up its operations near the southern Gaza city of Khan Younis on Monday amid the risk of a broader conflict in the Middle East, boosting demand for the safe-haven Gold price.
- Israel is also preparing for the possibility of an imminent attack by Iran and the Lebanese group Hezbollah in retaliation for the assassination of Hamas leader Ismail Haniyeh in Tehran in late July.
- Russian President Vladimir Putin told Ukraine to expect a worthy response to its recent cross-border incursion into western parts of the Kursk region, which was about 12 km deep and 40 km wide.
- This comes on top of market expectations for a bigger, 50 basis points interest rate cut by the Federal Reserve in September and continues to act as a tailwind for the non-yielding yellow metal.
- The upside for the XAU/USD, however, remains capped in the wake of a positive risk tone and as traders opt to move to the sidelines ahead of the critical US inflation figures.
- The US Producer Price Index (PPI) is due on Tuesday, followed by the US Consumer Price Index (CPI) on Wednesday and should provide fresh cues about the Fed's policy path.
- The readings are expected to show that inflation cooled in July, giving the US central bank headroom to start its policy-easing cycle, supporting prospects for further gains for the commodity.
Technical Analysis: Gold price could attract some dip-buying near the $2,448-2,450 resistance-turned-support
From a technical perspective, the overnight breakout through the $2,448-2,450 horizontal resistance was seen as a fresh trigger for bullish traders. Moreover, oscillators on the daily chart have been gaining positive traction and further suggest that the path of least resistance for the Gold price is to the upside. Hence, a subsequent move back towards challenging the record high, around the $2,483-2,484 area, looks like a distinct possibility. This is followed by the $2,500 psychological mark, which if cleared decisively will set the stage for an extension of the upward trajectory.
On the flip side, the $2,450-2,448 resistance breakpoint now seems to protect the immediate downside, below which the Gold price could slide back to the overnight swing low around the $2,424-2,423 region. The next relevant support is pegged near the $2,412-2,410 area ahead of the $2,400 round-figure mark. A convincing break below could expose the 50-day Simple Moving Average (SMA) support near the $2,376-2,375 region, which should act as a key pivotal point. Some follow-through selling could drag the Gold price to the late July low, around the $2,353-2,352 area. The latter coincides with the 100-day SMA and a sustained weakness below will shift the near-term bias in favor of bearish traders.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
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