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Gold price extends upside as Greenback dips ahead of US factory data

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FXStreet in Market News 12 331187
July 31, 2023 23:29

content provided with permission by FXStreet


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  • Gold price seeks US economic data to gauge a decisive move.
  • The US Dollar Index remains in the bullish trajectory as the tight labor market supports more rate hikes from the Fed.
  • The US manufacturing sector looks to be contracting for the ninth month in a row amid an aggressive rate-tightening cycle.

Gold price (XAU/USD) discovers support around $1,950.00 as the robust performance of the United States in the April-June quarter was offset by soft consumer spending data. The precious metal is under pressure as the US Dollar capitalizes on upbeat Gross Domestic Product (GDP) numbers and a robust Durable Goods Orders report.

United States factory activities have been contracting for the past eight months due to the aggressive rate-tightening cycle by the Federal Reserve (Fed). The manufacturing sector is broadly expected to continue reporting a vulnerable performance as firms struggle to tap credit due to the twin headwinds of higher interest rates by the Fed and tighter credit conditions among US regional banks.

Daily Digest Market Movers: Gold price recovers firmly ahead of US Manufacturing PMI

  • Gold price finds pressure above $,1,960 as investors shift focus to the July Manufacturing PMI reported by the United States Institute of Supply Management (ISM), which will be published on Tuesday at 14:00 GMT.
  • As per the expectations, Manufacturing PMI jumps to 46.5 from June’s figure of 46.0. In spite of higher factory activities, the Manufacturing sector is expected to remain in a contraction phase. Investors should note that a figure below 50.0 is considered contractionary and this would be the ninth contraction print in a row.
  • Meanwhile, the New Orders Index demonstrates that forward demand is expected to drop to 44.0 vs. the prior release of 45.6.
  • US factory activities are consistently facing the wrath of higher interest rates by the Federal Reserve. 
  • This week, the Gold price is expected to remain highly active as US factory data will be followed by Automatic Data Processing (ADP) Employment Change data, which will release on Wednesday at 11:45 GMT.
  • The US Dollar Index struggled to recapture the crucial resistance of 102.00 as Fed’s preferred inflation tool core Personal Consumption Expenditure (PCE) price index softened.
  • The US core PCE price index gained at a pace of 0.2% in June as expected by the market but remained slower than the 0.3% figure registered in May. On an annualized basis, the economic data softened to 4.1% vs. the expectations of 4.2% and the former release of 4.6%.
  • After Fed policymakers decided to remain dependent on incoming data for further action on interest rates, the essence of economic indicators increased significantly.
  • Last week, US Q2 Gross Domestic Product (GDP) data remained robust amid a tight labor market and stellar consumer spending. US GDP for the April-June quarter expanded by 2.4% against expectations of 1.8%.
  • In spite of aggressive policy-tightening by the Fed, a stellar performance in the second quarter indicates strength in the labor market and consumer demand.
  • Fed policymakers seem confident that the US economy will not enter into recession as demand for labor remains robust.
  • Consumer Sentiment improves significantly in July, delivering the highest reading of 71.6 since October 2021 but misses expectations of 72.6.
  • Easing inflationary pressures and strong employment conditions have remained major contributors to improving household sentiment.

Technical Analysis: Gold price climbs to near $1,970

Gold price remains sideways near the 20-day Exponential Moving Average (EMA) around $1.955.00 as investors shift their focus to factory activities and labor market data. On an hourly time frame, Gold price forms a bearish divergence that will be triggered after a breakdown below the crucial support of $1,940.00. An occurrence of the same would push the Gold price into a bearish trajectory.

Interest rates FAQs

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.