Gold slips as US yields rise, despite dovish Fed signals

• Gold retreats from a record high of $2,531 as US Treasury yields rise, with the 10-year note up 6.5 bps to 3.865%.

• US data shows mixed signals, with higher jobless claims and solid business activity despite ongoing manufacturing contraction.

• Fed Minutes hint at potential rate cut in September, but stronger US Dollar pressures Gold lower.

Gold price retreats on Thursday after running during the last five days to an all-time high (ATH) of $2,531. XAU/USD slumped below the previous ATH of $2,483 during Thursday’s session.

A tick up in US Treasury bond yields following the data release in the United States (US), bolstered the Greenback and weighed on the golden metal. The XAU/USD trades at $2,482, down by over 1%.

Data from the US Bureau of Labor Statistics (BLS) revealed that the number of Americans filing for unemployment benefits rose above estimates and the prior reading figures. Other data showed that Business Activity remains solid, even though manufacturing activity contracted for the second straight month, according to S&P Global.

Bullion traders digested the Federal Open Market Committee’s (FOMC) last meeting Minutes, released on Wednesday, which surprisingly showed that the “vast majority” of FOMC participants supported the case to ease policy at the September meeting if data met expectations.

The Minutes showed that policymakers had grown confident that inflation risks are skewed to the downside, while risks of achieving maximum employment had risen.

Boston Fed President Susan Collins echoed some of those views, commenting that the labor market is healthy and adding that it would be appropriate to lower interest rates soon. Recently, Philadelphia Fed Patrick Harker agreed with Collins on easing policy but added that the Fed should be methodical in cutting interest rates.

The non-yielding metal dipped even though Collins and Harker's views hinted at the first Fed cut. The rise in US bond yields, particularly the 10-year benchmark note up six and half basis points (bps) to 3.865%, boosted the buck. The US Dollar Index (DXY), which tracks the Greenback’s value against the other six currencies, rose by 0.39% to 101.52.

Given the backdrop, investors are preparing for Fed Chair Jerome Powell's commencement speech at Jackson Hole. In it, he’s expected to lay the groundwork for monetary policy for the second half of 2024.

Daily digest market movers: Gold price on the defensive post-US data

• Given the fundamental backdrop, profit-taking could be blamed as the main driver of Gold’s dip below $2,500 ahead of Powell’s speech.

• After today’s data, traders moderated their bets of the total amount of easing by the Fed in 2024, from around 102 bps to 94, via the Chicago Board of Trade (CBOT) December 2024 fed funds rate futures contract.

• US Jobless Claims rose to 232K in the week ending August 17, surpassing expectations of 230K and previous week's 228K.

• S&P Global Manufacturing PMI contracts again to 48.0; Services PMI rises to 55.2, beating estimates.

• US Existing Home Sales increased 1.3% in August, as expected, from 3.9 million to 3.95 million.

Technical outlook: Gold uptrend remains intact, despite surrendering $2,500

Gold’s uptrend remains intact, but a daily close below the previous ATH of $2,483 can trigger a deeper pullback.

The Relative Strength Index (RSI), despite being bullish, aims downwards, hinting that in the near term, sellers have the upper hand. Nevertheless, traders should be aware that in the mid-term, Gold is bullish.

If XAU/USD achieves a daily close below $2,500, sellers could push prices toward the May 20 peak of $2,450. Once that level is surpassed, further losses lie, and Gold could drop to the 50-day Simple Moving Average (SMA) at $2,398 before testing the next support at the 100-day SMA at $2,377.

On the other hand, if buyers lift Gold above $2,500, look for a re-test of the ATH at $2,531.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

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.

How often does the Fed hold monetary policy meetings?

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.

What is Quantitative Easing (QE) and how does it impact USD?

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.

What is Quantitative Tightening (QT) and how does it impact 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.