Less Hawkish Fed Expectations Fire Up Gold
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The US Dollar has officially declined to its lowest in almost three months as the US Dollar Index declined below 107.75. The US Dollar Index lost 300 points within three trading sessions after the US Bureau of Labor Statistics confirmed a lower-than-expected inflation reading. The Core CPI figure declined from 0.6% to 0.3%, and the CPI figure remained at 0.4% instead of rising, which had been predicted.
The above figure has resulted in the US Dollar significantly weakening against all its main competitors and a strong spike in the price of US equities and commodities such as gold. The volatility so far has not given any sign of the price movement being temporary but a complete change in price sentiment. Large institutional investors and individuals altered their positions, believing the Federal Reserve would not hike another 75-basis-points.
The stock market, which has generally been under significant pressure this year from rising interest rates, also saw strong volatility. Two major elements caused this. The first was that general company earnings showed that some sectors continue to see strong consumer demand, regardless of inflation and higher interest rates.
Nasdaq price chart.
The second is based on the lower inflation potentially leading to a smaller rate hike. However, traders should remember that economists and FOMC members do not believe the Central Bank will “pivot” completely.
The largest increase among indices was the Nasdaq, which increased by over 7.5%, as all major indices saw positive movement, including within Europe. Both the CAC and DAX have increased to a 5-month-high.
XAU/USD — Technical View
As expected, XAU/USD increased in value due to the substantial US dollar decline. It is also essential for traders to note that both the Dollar and Gold are safe haven assets. This means they compete for investments, and gold may benefit as the Dollar becomes less attractive.
When looking at technical indicators, most signals favor a longer-term upward trend. Moving averages on most timeframes have crossed over upward. However, the price on the daily timeframe has reached the 200-day Exponential Moving Average.
This has previously acted as a resistance point in August and June 2022. Therefore, market bulls will be looking for the price to establish itself above this point to maintain a bullish price movement.
XAU/USD price chart.
As mentioned above, the market’s sentiment change has been triggered by the US inflation rate unexpectedly declining to 7.7%. The inflation rate was initially expected to decline from 8.2% to 7.9 – 8.0%. Investors are hoping this will result in a slightly more dovish Federal Reserve.
However, investors should note this may not result in a “pivot” as inflation remains much higher than the bank’s target, and we still have a further CPI release before the rate decision. The news on inflation is not the only positive news for gold this week. This week, there was a clear decrease in the yield of US government bonds, which is also favorable for gold.
The United States 10-Year Bond fell to 4.159%. The US Commodity Futures Trading Commission also confirmed that the amount of speculated contracts for “long” positions has increased before and after the inflation reading. The report also confirmed that “short” positions have also steadily declined for almost one month.
