Gold jumps near weekly high on deepening Middle East crisis, persistent Fed rate cut bets

Gold price is aiming to reclaim weekly high as bets supporting Fed rate cuts deepen.
Fears of stubborn US inflation have faded after a surprisingly soft PPI report.
Deepening Middle East tensions have improved the appeal for safe-haven assets.

Gold price (XAU/USD) continues to enjoy decent demand on Monday’s European session amid multiple tailwinds. The precious metal is attracting investments as market participants seem more convinced about the Federal Reserve (Fed) reducing borrowing costs from March after the release of the surprisingly soft Producer Price Index (PPI) numbers for December.

Investors expect that a decline in the prices of goods and services at their factory gates will eventually result in easing inflation pressures further. This also suggests that inflation is progressively declining towards the 2% target.

Meanwhile, the appeal for Gold has also improved due to escalating geopolitical tensions in the Middle East. US and the UK military have launched airstrikes targeting Houthis in retaliation for attacking commercial shipments of Oil in the Red Sea. This has deepened fears of an escalating war in Gaza amid the potential participation of Iran in the Israel-Hamas war.

Daily digest market movers: Gold price reaches near weekly high on renewed Fed cut bets

Gold price shows stabilization above the crucial support of $2,050, supported by persistent rate cut expectations and a potential spillover of the Middle East crisis.
Investors’ confidence that the Federal Reserve (Fed) will redue interest rates from March has increased after the release of the softer-than-projected United States PPI report for December.
The annual PPI grew 1.0%, slower than the 1.3% anticipated by investors. The core PPI decelerated to 1.8% against the consensus of 1.9% and the prior reading of 2.0%.
Producers cut prices of goods and services at factory gates amid the decline in gasoline and food prices, which indicates a soft outlook for consumer price inflation and increasing odds that interest rates decline from March.
As per the CME Fedwatch Tool, chances in favour of a 25-basis-points (bps) interest rate cut to 5.00%-5.25% in March jumped to 70% from 62% after the PPI report.
Fed policymakers continue to reiterate the need to maintain interest rates in a restrictive trajectory to ensure that underlying inflation will return to 2% in a timely manner.
The next trigger for Gold price will be the monthly US Retail Sales data for December and the Fed’s Beige Book, which will be released on Wednesday.
Investors expect the US monthly Retail Sales to have grown by 0.4% against a 0.3% jump in November. Retail sales excluding automobiles are seen growing steadily by 0.2%.
On the global front, fears of a widening Israel-Hamas war have escalated after the airstrikes from the US and the UK on Houthis..
Deepening Middle East tensions have improved demand for non-yielding assets.
Meanwhile, the US Dollar Index (DXY) is stuck in a tight range around 102.50 amid lower trading volume as US markets are closed on account of Martin Luther King Birthday. The 10-year US Treasury yields have rebounded to near 3.98%.

Technical Analysis: Gold price aims to recapture weekly high above $2,060

Gold price is an inch far from recapturing a weekly high of $2,063 amid persistent bets that the Fed will cut interest rates in March. The precious metal delivered a sharp recovery after discovering strong buying interest while re-testing the crucial support around $2,040. The 14-period Relative Strength Index (RSI) has shifted into the upper range of 60.00-80.00, which indicates that a bullish momentum is active.

The broader appeal for Gold is also bullish as short-to-long-term daily Exponential Moving Averages (EMAs) are sloping higher. The 14-period RSI, on the daily timeframe, is aiming to climb above 60.00.

Interest rates FAQs

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

Source: https://www.fxstreet.com/news/gold-price-nears-weekly-high-supported-by-macroeconomic-and-geopolitical-tailwinds-202401151001