Gold Price Extends Its Decline as Traders Brace for US PMI Data
Gold Price Decline Amid Stronger US Dollar
Gold prices have continued their downward trend, marking the third consecutive day of losses during Tuesday’s early European session. The precious metal’s decline is primarily driven by the strength of the US Dollar (USD) and rising US Treasury bond yields, which have exerted selling pressure on Gold. As the USD strengthens, it often diminishes the appeal of Gold as an alternative asset, especially since Gold is priced in USD.
Despite these headwinds, some factors could limit further losses for Gold. The growing anticipation that the US Federal Reserve (Fed) will cut interest rates in September is one such factor. Lower interest rates typically reduce the opportunity cost of holding non-yielding assets like Gold, making it a more attractive option for investors.
Geopolitical Risks and Safe-Haven Demand
Another critical factor supporting Gold prices, even as they face selling pressure, is the ongoing geopolitical tensions, particularly in the Middle East. The region has been fraught with conflicts, and recent events have heightened concerns. For instance, protests erupted across Israel on Monday over the government’s failure to secure a ceasefire-for-hostages deal with Hamas. The situation escalated further with the killing of six hostages in Gaza, whose bodies were retrieved by Israeli soldiers over the weekend.
These geopolitical uncertainties often boost demand for safe-haven assets like Gold. Investors typically flock to Gold in times of crisis, seeking refuge from the volatility and uncertainty that can impact other financial markets. As such, while Gold faces downward pressure from a stronger USD and higher bond yields, the potential for geopolitical events to drive safe-haven demand remains a key factor that could support its price.
XAU/USD Daily Price Chart
Source: TradingView, prepared by Richard Miles
Upcoming US Economic Data and Market Sentiment
Looking ahead, the market’s attention is firmly focused on the release of key US economic data, which could provide fresh impetus for Gold prices. The Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers Index (PMI) for August, set to be published on Tuesday, is one such critical data point. The PMI is expected to show a slight improvement, with forecasts suggesting an increase to 47.5 from 46.8 in July. Meanwhile, the Services PMI is estimated to decline slightly to 51.1 in August from 51.4 previously.
In addition to the PMI data, the highlight of the week will be the US Nonfarm Payrolls (NFP) report for August. The report is expected to show the addition of 163,000 jobs, with the unemployment rate forecasted to tick lower to 4.2%. The NFP data is particularly significant as it could influence the Federal Reserve’s decision-making process regarding interest rate cuts. A strong jobs report could reduce the likelihood of aggressive rate cuts, which might weigh on Gold prices. Conversely, weaker-than-expected data could bolster expectations for a rate cut, potentially providing support for Gold.
Market Expectations for Fed Rate Cuts
According to the CME FedWatch tool, the market is pricing in a nearly 69% chance of a 25 basis points (bps) rate cut by the Federal Reserve in September. There is also a 31% probability of a more substantial 50 bps rate reduction. The prospect of rate cuts has been a significant driver of market sentiment in recent weeks, and any shift in expectations could have a pronounced impact on Gold prices.
Lower interest rates generally support Gold prices by reducing the opportunity cost of holding the metal, as Gold does not yield interest or dividends. Therefore, any indication that the Fed is leaning toward rate cuts could provide a bullish impetus for Gold, despite the current selling pressure.
Technical Analysis: Gold Price Maintains a Positive Long-Term Outlook
From a technical perspective, Gold’s longer-term outlook remains constructive, even as it faces short-term selling pressure. The price of Gold remains well above the key 100-day Exponential Moving Average (EMA), which currently serves as a significant support level. The 14-day Relative Strength Index (RSI) also reinforces the positive outlook, standing above the midline at around 55.70. This suggests that the upward momentum in Gold is more likely to resume than to reverse.
Key resistance levels for XAU/USD are identified in the $2,530-$2,540 zone, which aligns with the upper boundary of a five-month-old ascending channel and the all-time high. A decisive break above this level could see Gold rally towards the $2,600 psychological level.
On the downside, the low of August 22 at $2,470 acts as initial support. A break below this level could drag Gold prices further south, with the next support levels at $2,432 (the low of August 15) and $2,372, where the 100-day EMA lies.
Balancing Risks and Opportunities
In summary, Gold prices are under pressure due to a stronger USD and rising bond yields, but several factors could limit further losses. The anticipation of Fed rate cuts and ongoing geopolitical risks provide potential support for Gold. Meanwhile, upcoming US economic data, particularly the ISM PMI and NFP report, will be critical in shaping market sentiment and determining the near-term direction of Gold prices. Despite the current selling pressure, the longer-term technical outlook for Gold remains positive, with key support and resistance levels likely to play a crucial role in the days ahead.
