In Wednesday’s European session, the price of gold (XAU/USD) hovers close to its lowest point in over three weeks, sitting around $2,285. This decline comes as the US dollar and bond yields strengthen, fueled by strong speculation that the Federal Reserve (Fed) will continue to keep interest rates high for a longer time due to persistent inflation concerns in the first quarter.
Adding to this, the 10-year US Treasury yields rise to 4.69%. The US Dollar Index (DXY), which measures the dollar against major currencies and usually moves inversely to gold, surges to a two-week high of about 106.50. Last week, the dollar was under pressure following sluggish growth in Q1 Gross Domestic Product (GDP), raising worries about the US economy. However, it rebounds strongly on Tuesday after the US Bureau of Economic Analysis (BEA) reports robust Q1 Employment Cost Index figures.
The Employment Cost Index reflects a robust wage growth environment with high demand for labor. It shows a 1.2% increase in the first quarter, surpassing expectations of 1.0% and the previous reading of 0.9%. This further indicates significant inflationary pressures during the January-March period.
Daily Digest Market Movers: Gold Price Weakens as US Dollar Nears Four-Week High
- Gold Price Decline: Gold prices have sharply fallen below the key support level of $2,285. This drop comes amid expectations that the Federal Reserve will continue to maintain a hawkish stance on interest rates in its monetary policy meeting. The Fed has kept interest rates steady at 5.25%-5.50% for the sixth consecutive time.
- Inflation Concerns: A series of inflation readings this year have been higher than expected, indicating a halt in the disinflation process. This suggests that the Fed may need to keep interest rates high for a longer duration until policymakers are confident that inflation will return to the desired rate of 2%.
- Impact on Gold: The prospect of sustained high interest rates is unfavorable for gold as it raises the opportunity cost of holding the precious metal as an investment.
- Market Focus: Investors are eagerly awaiting information on the timing of potential rate cuts and the status of the Fed’s three rate-cut projections, as indicated by March’s dot plot. The CME FedWatch tool suggests that traders anticipate the Fed to begin reducing interest rates starting from the September meeting.
- Upcoming Data Releases: Before the Fed’s interest rate decision, the market will pay close attention to the release of the ADP Employment Change and the ISM Manufacturing PMI data for April during Wednesday’s session. Economists predict that US private payrolls increased by 175K, slightly lower than the previous figure of 184K. The Manufacturing PMI is expected to decrease to 50.0 from 50.3 in March.
- Focus on New Orders: Investors will particularly focus on the New Orders subcomponent of the Manufacturing PMI report. The preliminary PMI survey by S&P Global for April revealed a cooling of output growth aligned with weak demand, with new orders declining for the first time in six months. This decline was observed across both manufacturers and service providers, albeit moderately. Positive employment and factory data would enhance the US economic outlook, while weak figures would raise concerns about a slowdown.
Technical Analysis: Gold Price Slips Below $2,300
Gold has experienced significant losses recently, triggered by a breakdown of the Bearish Flag pattern seen in the four-hour chart. This pattern typically occurs after a sharp decline, followed by a period of consolidation, and usually indicates a continuation of the existing downtrend.
Currently, the short-term outlook for gold appears bearish as its price is trading below the 20-period Exponential Moving Average (EMA), which is positioned at $2,312.
Looking ahead, the key support level to watch is the high reached on March 23, which stands at $2,223. If gold breaches this level, it could signal further downside potential.
The 14-period Relative Strength Index (RSI) is oscillating within the bearish zone of 20.00-40.00, indicating that momentum is tilted towards the bearish side. This suggests that selling pressure may continue in the near term.
