Gold (XAU/USD) recovers slightly after touching a fresh low since March 23, though it retains a bearish bias near the $4,200 mark through the early European session on Wednesday. Renewed hostilities between the US and Iran fuel inflationary concerns and bolster bets for more hawkish central banks, which, in turn, is seen as a key factor driving flows away from the non-yielding yellow metal. Furthermore, the decline could be attributed to technical selling following the recent breakdown below the very important 200-day Simple Moving Average (SMA).
The US launched self-defence strikes against Iran on Tuesday in retaliation for the downing of a US Apache helicopter in the Strait of Hormuz. In response, Iran’s Islamic Revolutionary Guard Corps (IRGC) said it has targeted an airbase in Jordan hosting US forces, as well as Kuwait and Bahrain, and warned of “a more severe response” if the US aggression continues. Furthermore, Iran’s Foreign Minister Abbas Araghchi said that the country’s armed forces would not leave any attack or threat unanswered and warned the US to leave the region or face consequences. This keeps geopolitical risk premiums in play and helps Crude Oil prices to hold above a two-month low, touched the previous day.
According to the CME Group’s FedWatch Tool, traders are assigning nearly a 75% chance that the US Federal Reserve (Fed) will hike interest rates by the end of this year amid concerns about sticky inflation due to elevated energy prices. However, the US Dollar (USD) bulls seem hesitant and opt to wait for the release of the latest US consumer inflation figures before placing fresh bets. The crucial US Consumer Price Index (CPI) report will play a key role in influencing market expectations about the Fed’s policy path, which, in turn, should provide some meaningful impetus to the USD. In the meantime, the fundamental backdrop might continue to exert pressure on the Gold price.
XAU/USD daily chart
Gold bears turn cautious amid oversold conditions; not out of the woods yet
From a technical perspective, the latest leg down confirms a fresh breakdown below a downward-sloping channel extending from the April swing high. Moreover, the precious metal remains entrenched below the 200-day Simple Moving Average (SMA), validating the near-term negative outlook and backing the case for further losses.
Moreover, the daily Relative Strength Index (14) near 28 signals oversold conditions, and the Moving Average Convergence Divergence (MACD) indicator deep in negative territory reinforces prevailing bearish momentum. This leaves the Gold price vulnerable to further declines, towards retesting the March swing low, around the $4,100 mark.
On the topside, initial resistance is seen at the former channel floor around $4,238, followed by the 200-day SMA near $4,444. A recovery back above the latter would begin to ease the broader downside pressure implied by the dominant descending channel and lift the Gold price further to the channel top near $4,546 and the prior swing reference around $4,634.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
