Tech Beat: The Fate of Gold Hangs on $1,898 Support Level

August 16, 2023 (MLN): The international spot gold (XAU/USD) is facing a critical decision point at the $1,898 support zone.

This level is a key barrier for further downside movement, as it has already triggered a rebound of about 0.7% yesterday. The price is currently testing this support again, and a break below it could open the door for more losses.

While on the flip side, the bias will remain tilted towards the downside unless there's a reclaim of $1,928-1,935. Such a move would create an opening for a potential retest of the primary resistance level at $1,974.

XAU/USD Daily time-frame chart:

Global Economic Woes Boost US Dollar and Hurt Other Currencies

Until there is a positive shift in global economic conditions, the demand for the US Dollar is anticipated to remain high, leading to reduced attractiveness of gold.

Furthermore, a strong US Dollar makes other currencies lose their appeal, thereby increasing the cost of gold for individuals holding different currencies, given its denomination in US dollars.

The People’s Bank of China (PBoC) unexpectedly lowered the one-year medium-term lending facility (MLF) rates by 15 bps to 2.5% yesterday to support its economy which is facing new threats from a deteriorating housing market and low consumer spending.

Yuan fell to the lowest level since November 2022 against the US Dollar.

Additionally, Japan’s currency (JPY) fell to a level that prompted the first intervention to buy yen by the Ministry of Finance in 1998.

More Rate Hikes

Meanwhile, the Bank of Russia raised its key rate by 350 basis points to 12% yesterday in order to limit risks to price stability, citing that the inflationary pressure continues to increase. As of August 07, annual inflation increased to 4.4%.

At the same time, the current rate of price growth continues to accelerate.

The Russian Ruble remains one of the three weakest currencies in developing economies this year, dropping more than 24%.

Additionally, the Central Bank of the Argentine Republic (BCRA) also raised the monetary policy rate by 21% to 118% on August 14.

The Argentine Pesos (ARS) plunged by around 18% against the US Dollar following the rate hike (current rate $1 = 349.97 ARS).

US Fed, Inflation and Gold

The trajectory of gold remains closely tied to US interest rates and inflationary pressures.

The U.S. consumer price index (CPI) for the month of July 2023 came in at 3.2% YoY, slightly higher than 3% YoY in June. However, it was softer than the analysts’ estimates of 3.3%, showing a moderation in the inflationary momentum in the world’s largest economy.

Note: Inflation rose for the first time in 12 months

Presently, market participants are putting in just a 10% probability of a rate hike in September.

However, it is noteworthy that core inflation remains sticky, marking a 4.7% YoY increase in July. This indicates that the Fed's job is not done yet, and it remains far from achieving its 2% target, thereby maintaining the possibility of an additional rate hike in September.

Disclaimer: The opinions in this article are the author’s and do not necessarily represent the views of Mettis Link News (MLN). Nothing in this article should be considered the sole basis for making financial decisions.

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