Global macro overview for 18/07/2018
XAUUSD quotes marked a 1.0% sell-off on and were at the lowest level for a year. The reasons behind this drop were found in the strengthening of the US Dollar and the speech of the chairman of the Federal Reserve.
Testifying before the Senate Committee, Jerome Powell said that “with the right monetary policy, the labor market will remain strong and inflation will remain close to the 2% target in the next few years.” In principle, it was difficult to expect the Fed’s chief to say something else. But his comments were considered “hawks” any more and subsequent “gradual” interest rate increases are on the way.
The Fed “believes that – at least for now – the best way to proceed is to maintain a gradual increase in the federal funds rate,” Powell said, reserving not to raise rates too fast and too high.
In fact, all this has already been said (or written) after the June increase in the federal funds rate. In the opinion of economists, the Fed will raise rates twice this year – by 25bp. higher than expected at the beginning of the year. And yet after Powell’s speech, the dollar started strengthening against the euro – the EUR/USD rate fell by 0.4%.
The combination of rising interest rates in the US and dollar appreciation is doubly unfavorable for gold prices. First, because the alternative cost of holding cash in gold is increasing – by which it does not earn almost 3%. annually on US Treasury bonds. Secondly, because the increase in the dollar prices is traditionally correlated with lower prices of gold – yellow metal is getting more expensive for investors from outside the US.
Let’s now take a look at the XAUSUD technical picture at the daily time frame. The effects of Powell speech were very bad for gold prices. The royal metal rate dropped by more than 1.0%, going down to USD 1227.80 per ounce. For the last time, such low gold prices were seen exactly a year ago – on July 17, 2017. After breaking the support in the form of a December low (around 1240 USD / oz), the next target for bears may be seen around the level of USD 1,200, where declines in March and July stopped in 2017.