The price of gold experienced its second consecutive day of selling pressure on Tuesday, August 8, 2023, as it plunged to a new daily low of around $1,931 during the Asian trading session. Despite this decline, the XAUUSD currency pair managed to stay above the three-and-a-half-week low hit last Friday. This selling trend, accentuated by the strengthening US Dollar (USD), underscores a challenging environment for the precious metal.
The Federal Reserve's (Fed) prospective policy tightening has been supporting the USD, adding to the downward pressure on the gold price. Market experts believe the Fed will implement another 25 basis point (bps) rate hike, possibly in September or November 2023, aligned with the latest monthly employment data from the US. Despite the minor disappointment in the Non-Farm Payrolls (NFP), indicators like solid wage growth and a decline in unemployment suggest an optimistic economic outlook, thus boosting the probability of a soft landing for the US economy.
Adding to the dynamics influencing gold prices are comments from Fed Governor Michele Bowman and New York Fed President John Williams. Bowman emphasized the necessity of further rate hikes to curb inflation, while Williams expressed a more cautious stance, not ruling out potential rate cuts in early 2024 depending on economic data. These differing perspectives, combined with supportive US Treasury bond yields, have strengthened the USD, leading to a shift from non-yielding gold and pressurizing its price further.
Traders are eagerly awaiting the release of fresh consumer inflation data from China and the US on Wednesday and Thursday. The numbers could shed light on the global deflationary outlook, influencing expectations for more Fed rate hikes and subsequently affecting gold's performance. With consensus estimates predicting moderation in inflationary pressures, any stronger-than-expected data might reinforce the case for another rate hike by year-end, placing further pressure on gold.
The outlook for gold remains uncertain amid mixed economic signals. While the precious metal is traditionally viewed as an inflation hedge, recent developments in the economy and policy decisions have led to downward pressure on its price. The recent emergence of selling coupled with a three-week downtrend suggests that the path of least resistance for XAU/USD remains to the downside, requiring caution for those planning to position in the gold market.
For Forex traders, the ongoing fluctuations in gold prices present opportunities and challenges alike. The interplay between the USD and gold prices underscores the intricate relationship between commodities and Forex markets. The expected Fed rate hikes and the subsequent strengthening of the USD have had pronounced effects on the Forex market, causing shifts in currency pairs like XAU/USD. Furthermore, gold's status as a traditional safe-haven asset means that its price is often inversely correlated with the USD in Forex trading. Hence, the current dynamics in the gold market and the anticipated policy actions by the Fed are crucial considerations for Forex traders, as they navigate the complexities of the ever-changing global Forex landscape.