Gold Rises as Dollar Falters and Wanes

Gold Price Continues Upward Momentum Amid Central Bank Rate Cuts

Gold’s Two-Week High

Gold price (XAU/USD) continues its upward momentum for the second consecutive day, reaching a two-week high around the $2,373 mark during the Asian session on Thursday. This rise is largely driven by market expectations that major central banks will lower borrowing costs to stimulate economic activity. The recent movements in the gold market reflect a broader trend where investors seek safe-haven assets amid economic uncertainty and potential monetary policy shifts.

Central Banks Rate Cut Actions

1. Bank of Canada (BoC): On Wednesday, the BoC lowered its benchmark rate for the first time in four years. This decision, prompted by concerns over slowing economic growth, marks a significant shift from its previous stance of maintaining rates at a more than two-decade high. The rate cut by the BoC is a clear indication that central banks are becoming increasingly concerned about the global economic outlook. Lower interest rates generally reduce the opportunity cost of holding non-yielding assets like gold, thereby boostingits appeal..

2. European Central Bank (ECB): The ECB is anticipated to cut interest rates for the first time since March 2016 at the end of its June policy meeting later today. This move is expected to further support the bullish sentiment in the gold market. The ECB’s potential rate cut is seen as a response to persistent low inflation and sluggish economic growth in the Eurozone. By reducing borrowing costs, the ECB aims to encourage spending and investment, which could help revive economic activity. However, lower interest rates also tend to weaken the currency, making gold more attractive as an alternative investment.

Federal Reserve’s Potential Rate Cut

• US Economic Slowdown: Amid signs of a slowdown in the US economy, markets are now pricing in a greater chance of an imminent rate cut by the Federal Reserve (Fed). The Fed’s dovish stance is driven by concerns over trade tensions, slowing global growth, and subdued inflation. Investors are closely watching the Fed’s actions as they have significant implications for the US Dollar and gold prices. A rate cut by the Fed would likely lead to a weaker dollar, making gold cheaper for holders of other currencies and boosting its demand.

• Impact on US Treasury Yields: These expectations have kept US Treasury bond yields depressed near their lowest levels in over two months, which in turn, has failed to support the US Dollar (USD) despite its modest recovery gains over the past two days. Lower bond yields reduce the attractiveness of fixed-income investments, prompting investors to seek alternatives like gold. The inverse relationship between bond yields and gold prices is well-documented, as lower yields decrease the opportunity cost of holding gold.

• Geopolitical Tensions: Ongoing conflicts in the Middle East continue to provide a tailwind for the safe-haven gold price. Geopolitical risks often drive investors towards safe-haven assets like gold, which are perceived as a store of value during times of uncertainty. The current geopolitical landscape, characterized by conflicts and tensions, adds another layer of support for gold prices. Investors are hedging against potential market volatility and economic disruptions by increasing their exposure to gold.

Despite these supportive factors, the upside for XAU/USD seems limited as traders await the release of the US Nonfarm Payrolls (NFP) report on Friday. The NFP report is a critical indicator of labor market health and can significantly influence market expectations regarding future monetary policy actions. A strong NFP report could dampen expectations of a Fed rate cut, potentially capping the upside for gold prices.

Daily Digest Market Movers Fed Rate Cut Bets and Weaker USD Support Gold

1. Mixed US Macro Data: Mixed US macroeconomic data released on Wednesday reaffirmed expectations that the Federal Reserve will start cutting interest rates later this year. This has dragged US Treasury bond yields lower, benefiting the non-yielding gold price. The data highlights the mixed signals from the US economy, with some indicators pointing to strength while others suggest weakness. This uncertainty supports the case for a more accommodative monetary policy stance by the Fed.

2. Private Sector Employment: According to the Automatic Data Processing (ADP), private sector employment in the US rose by 152K in May, falling short of the anticipated 173K and the previous month’s downwardly revised reading of 188K (originally reported as 192K). The weaker-than-expected employment figures add to the narrative of a slowing economy, reinforcing the market’s expectations of a Fed rate cut. Employment data is a crucial component of the Fed’s assessment of economic health, and any signs of weakness can prompt a dovish response.

3. ISM Services PMI: The Institute for Supply Management’s (ISM) Services PMI rose to 53.8 in May, its highest level since August, surpassing consensus estimates of 50.8. Meanwhile, the Prices Paid sub-component edged lower to 58.1 from 59.2, indicating easing inflationary pressures. The ISM Services PMI is a key indicator of economic activity in the service sector, which constitutes a significant portion of the US economy. The higher-than-expected PMI reading suggests resilience in the service sector, but the lower Prices Paid sub-component points to easing inflation, which supports the case for a rate cut.

Easing Inflation and Lower Treasury Yields

• PCE Price Index: The softer US Personal Consumption Expenditures (PCE) Price Index released on Friday pointed to easing inflationary pressures. This data contributed to the decline in US Treasury bond yields, offering some support to the yellow metal. The PCE Price Index is the Fed’s preferred inflation gauge, and lower readings suggest that inflation remains below the Fed’s target. This provides the Fed with more room to cut rates without the risk of overheating the economy.

• 10-Year and 2-Year Yields: The benchmark 10-year US Treasury yield fell to a two-month low at 4.28%, while the yield on the rate-sensitive 2-year US government bond slipped to 4.731%. These declines are amid speculations that the official job data will fall short of expectations. Lower yields across the yield curve reflect market expectations of future rate cuts and a more accommodative monetary policy stance. This environment is generally supportive of gold prices, as it reduces the opportunity cost of holding non-yielding assets.

Market Reactions and Future Data Releases

• US Dollar Reaction: Although the US Dollar reacted positively to the data, the further decline in US Treasury bond yields supported the yellow metal, lifting it to a fresh weekly peak during the Asian session on Thursday. The interplay between the US Dollar and gold prices is complex, as both are considered safe-haven assets. However, in the current environment, lower bond yields and expectations of rate cuts are tilting the balance in favor of gold.

• Weekly Initial Jobless Claims: Traders are now looking forward to the release of the Weekly Initial Jobless Claims data from the US for further impetus. The jobless claims data provides a timely snapshot of labor market conditions and can influence market expectations regarding the NFP report. Lower-than-expected jobless claims could temper expectations of a Fed rate cut, while higher claims would reinforce the case for monetary easing.

• Focus on Nonfarm Payrolls: However, the primary focus remains on the US monthly employment details, specifically the Nonfarm Payrolls (NFP) report on Friday, which is expected to provide significant market direction. The NFP report is one of the most closely watched economic indicators and can have a substantial impact on financial markets. A strong NFP report could lead to a reassessment of Fed rate cut expectations, potentially capping the upside for gold prices. Conversely, a weak report would likely bolster gold prices by increasing the likelihood of monetary easing.

Conclusion

The gold market is currently being influenced by a combination of central bank rate cuts, expectations of further monetary easing, and ongoing geopolitical tensions. While the near-term bias remains bullish, traders are cautiously awaiting key economic data releases to gauge the future direction of the gold price. The interplay between these factors will likely continue to drive market sentiment in the coming days. Investors should keep a close eye on central bank actions, macroeconomic data, and geopolitical developments to navigate the evolving landscape of the gold market.