- Gold faces a hangover on Wednesday after a wild ride the previous day.
- Traders are having difficulties reading Fed Chairman Powell’s speech, with a second testimony ahead.
- The $3,000 level is out of the cards this week as a technical barrier must first be overcome.
Gold’s price (XAU/USD) is facing some profit-taking pressure and trades below $2,900 throughout this Wednesday after Federal Reserve (Fed) Chairman Jerome Powell went to Capitol Hill for his semi-annual testimony before lawmakers the previous day and before the US Consumer Price Index (CPI) data for January release. Powell did not say much but stated that the current level of the monetary policy rate is helping the central bank to withstand market volatility and potential inflation shocks that could take place. The comments were enough to fuel a small surge in US bond yields.
Meanwhile, traders see their beloved Fed under pressure from the Department of Government Efficiency (DOGE), led by Elon Musk, who already mentioned at the beginning of the week that the Fed will face scrutiny from DOGE, as it will from all other government agencies. DOGE has already tried accessing all US Treasury Data, though access to the US Treasury system remains blocked for now.
Daily digest market movers: Markets brace for more from Powell
- At 15:00 GMT, Fed Chairman Jerome Powell testifies on his second day in Congress before the US House Financial Services Committee.
- At 17:00 GMT, Federal Reserve Bank of Atlanta President Raphael W. Bostic gives remarks at the Atlanta chapter of the National Association of Corporate Directors.
- At 22:05 GMT, Federal Reserve Governor Christopher Waller is set to speak at “A very Stable Conference: Stablecoin Infrastructure for Real World Applications” in San Francisco, California.
- Australia’s second-largest Gold miner, Evolution Mining Ltd., expects prices to rise further in the near term after the company posted record first-half profits following bullion’s rally to near $3,000 an ounce, Bloomberg reports.
- The CME FedWatch tool shows a 95.5% chance that interest rates will remain unchanged in March, compared to a slim 4.5% chance of a 25 basis point (bps) interest rate cut.
Technical Analysis: Technical bearish signal
With Fed Chairman Powell’s testimony, Gold might have shot itself in the foot after its volatile session on Tuesday. With the price action now below the daily Pivot Point (at $2,907), Bullion is not facing just the Pivot Point’s resistance levels, it also needs to break through a Pivot Point level. In theory, an opening below the daily pivot is always seen as bearish and is often a sign more downside is to come in the same trading day.
The first support level on Wednesday is $2,872, which is the S1 support. From there, S2 support should come in at $2,846. In case of a sharp correction, the bigger $2,790 level (October 31, 2024, high) should be able to catch any falling knives.
On the upside, the daily Pivot Point at $2,907 is the first big level that needs to be recovered. From there, the R1 resistance comes in at $2,933. In case the rally continues, the $2,950 big figure psychological level and the R2 resistance at $2,968 will be tested for a break to the upside. Further up, the $3,000 psychological level could be next.
XAU/USD: Daily Chart
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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