Gold prices surged above $2,330 as investors anticipate the Federal Reserve (Fed) to cut interest rates later this year due to rising inflation data in the United States (US). Additionally, political turmoil in Europe triggered a flight to safe-haven assets, boosting demand for gold. The XAU/USD traded at $2,333, gaining over 1.30% after bouncing off daily lows. Despite sour sentiment, US equities saw some recovery towards the end of the trading day.
US Consumer Sentiment dipped in June, while inflation expectations remained above the Fed’s 2% target. Despite US inflation data being positive earlier in the week, investors are still betting on two rate cuts by the Fed instead of one. The US 10-year Treasury yield fell, benefiting gold, despite China pausing its bullion buying spree. The People’s Bank of China held steady at 72.80 million troy ounces of gold in May.
In other news, the US Dollar Index (DXY) rose by 0.28%, capping gold prices. University of Michigan Consumer Sentiment Index fell to 65.6 in June, the lowest level in seven months. On Wednesday, Fed Chair Jerome Powell expressed concerns about inflation and stated they are ready to act if necessary. Even though recent inflation reports were weaker than expected, small businesses are facing higher prices and financing challenges.
Technical analysis shows that gold prices may face further downside as sellers gain control. The Head-and-Shoulders chart pattern suggests a possible drop below $2,300. The Relative Strength Index (RSI) remains bearish, indicating a potential for more losses. If XAU/USD drops below $2,300, the next support levels to watch are around $2,277 and $2,222, with a possible target at $2,170 to $2,160.
The Federal Reserve (Fed) plays a crucial role in shaping monetary policy in the US. With the mandate to achieve price stability and full employment, the Fed adjusts interest rates to achieve these goals. When inflation is high, the Fed raises rates, resulting in a stronger US Dollar. In contrast, if inflation is low or unemployment is high, the Fed may lower rates to stimulate borrowing, which weakens the Greenback.
The Fed holds eight policy meetings annually, where the Federal Open Market Committee (FOMC) makes monetary policy decisions. In extreme situations, the Fed may resort to Quantitative Easing (QE) to increase credit flow in the financial system. QE involves the Fed buying bonds from financial institutions to boost liquidity. Quantitative tightening (QT) is the reverse process, where the Fed stops buying bonds, potentially strengthening the US Dollar. Overall, gold prices are influenced by various factors, including Fed policy decisions, economic data, and geopolitical events.
