Gold price surrenders intraday gains despite firm rate cut bets

• Gold price eases intraday gains amid recovery in US Treasury yields.
• The broader appeal for the Gold price is bullish as Fed may unwind its restrictive policy stance sooner.
• The USD Index is expected to end 2023 with losses of around 2.5%.

Gold price (XAU/USD) faced nominal pressure on Thursday after registering a fresh three-week high. The precious metal surrendered some gains as profit-booking kicked-in after the sharp rally of the last two weeks. This came as the opportunity cost of owning the non-yielding metal rose amid US Treasury yields showing signs of recovery. 

The broader appeal for the Gold price, however, is expected to remain upbeat as investors see the Federal Reserve (Fed) reducing interest rates from March and with underlying inflation clearly now in a downward trajectory. The US Dollar is consistently facing a sell-off amid early rate cut expectations, helping to underpin the precious metal’s Dollar-denominated value.

Contrary to investors’ expectations, Fed policymakers see a high likelihood of a market reaction on rate-cut commentary from Federal Reserve Chairman Jerome Powell. Fed policymakers have been considering rate cut discussions as “premature” in the current scenario amid absence of confidence in inflation declining towards 2%.

Daily Digest Market Movers: Gold price falls as US yields rebound

• Gold price faces marginal selling pressure amid a recovery in US Treasury yields. The 10-year US Treasury yields rebounded to near 3.82%,
• Earlier, the Gold price extended its four-day winning spell as market participants are pricing in a rate cut by the Federal Reserve from March 2024.
• The Fed is expected to start reducing interest rates as inflation in the United States economy is in a downtrend.
• As per the CME Fedwatch tool, market participants see more than 88% chance of the Fed cutting interest rates in March. The likelihood of the Fed trimming interest rates further in May is more than 65%.
• Bets in favour of early rate cuts by the Fed are very healthy as the underlying inflation rate has dropped to 3.2% in November. The Fed, in its latest projections, anticipated this number at the end of December 2023.
• There is a reasonable chance that the Fed will achieve a soft landing as the Unemployment Rate has been steady around 3.7% and lay-offs have remained lower than new payroll additions in every month of 2023.
• As 2024 is set to kick-in, a further move in the Gold price would be guided by whether investors have priced in rate cuts too much or whether economic shrinkage will emerge suggesting current pricings are fair.
• A league of investors and Fed policymakers believe that investors have gone too far ahead in discounting rate cuts. The impact is clearly visible in the US Dollar Index (DXY), which is down 6.31% from October’s high of 107.35.
• The USD Index is expected to end the year with a loss of almost 2.5% on expectations that the Fed would be the first major central bank to cut.
• Nevertheless, other western economies are also expected to start reducing interest rates as price pressures are easing globally.
• Unlike other economies that are prone to economic contraction, the US economy is resilient. Sheer strength in economic prospects could keep additional inflationary pressures above the required rate of 2%.
• Due to a light economic calendar, second-tier weekly Initial Jobless Claims data for the week ending December 22 may bring some action in the FX domain.
• Market participants are anticipating individuals claiming jobless benefits rose to 210K, nominally higher than the former reading of 205K.
• Next week, employment and Manufacturing PMI data for December will keep investors busy.

Technical Analysis: Gold price prints a fresh three-week high

Gold price prints a fresh three-week high near $2,090 as investors hope that the opportunity cost of holding non-yielding bullions will be lower as interest rates come down. The precious metal is expected to remain in a bullish trajectory, being supported by upward-sloping 20 and 50-day Exponential Moving Averages (EMAs). Momentum oscillators have shifted into the bullish range, indicating more upside ahead.