Gold rises above 50-day SMA after weak US data

• Gold rises above the 50-day SMA after weak US data releases raised bets that the Fed will cut interest rates.
• Lower interest rates are positive for Gold.

He Gold (XAU/USD) Gold is rising on Thursday to trade at $2,350 after a series of weak US data releases and a change in tone from Federal Reserve (Fed) Chairman Jerome Powell raised bets that the Fed would cut interest rates sooner than expected. Such a move would make gold more attractive as an investment as it is a non-interest-bearing asset.

It is also possible that long-term investors have been accumulating gold, ready for another rally due to multiple geopolitical and macroeconomic factors that favor the precious metal in the long term.

Gold has successfully closed above the 50-day simple moving average (SMA), which has been limiting its gains for several days. This further improves the outlook for the yellow metal from a technical perspective.

Gold breaks out after a string of weak US data

Gold is rallying after weak US data indicates that the world’s largest economy is cooling. This suggests that inflation will fall more quickly and makes it more likely that the Fed will cut interest rates. Lower interest rates, in turn, make gold more attractive as an investment because they reduce the opportunity cost of holding the non-interest-paying asset.

Weak US data included the US ISM Services Purchasing Managers’ Index (PMI), released on Wednesday, which revealed a slowdown in the sector. This is especially significant as the sector has so far been a major driver of high inflation. The June reading showed a drop to 48.8 from 53.8 in May, which was well below the consensus estimate of 52.5. Although the services prices paid component remained in expansion territory at 56.3, that was still lower than May’s 58.1.

US employment data was also lower. US Initial Claims for Jobless Benefits rose to 238,000 in the week ended June 29, which was higher than estimates of 235,000 and 233,000 the previous week. At 1.858 million, continuing claims were at their highest level since November 2021. ADP Employment Change, which measures the number of new private payroll employees, showed an increase of 150,000 in June, which was lower than the May figure and economists’ forecast of 160,000.

The minutes from the Federal Reserve’s June meeting maintained a neutral, data-dependent tone. The Fed said it wanted to see more progress on inflation, which was still at 2.7% (before the most recent data showed a drop to 2.6%), and weaker economic data overall before hitting the interest rate cut button. This was before Chairman Powell’s speech in Sintra, where he sounded more optimistic about declining inflation, although he still said more data was needed before making a rate cut decision.

The anticipation of lower interest rates is positive for Gold as it reduces the opportunity cost of holding the non-interest paying asset.

Gold gains in a broader global context

Gold is seeing further gains due to broader geopolitical and macroeconomic factors.

Ongoing conflicts in the Middle East and Ukraine and a political shift to the right in Europe are increasing the number of investors choosing to store their wealth in Gold.

In the US, the Supreme Court’s decision to grant former US President Donald Trump partial immunity over allegations that he incited the uprising that followed his defeat in 2020, combined with doubts about President Joe Biden’s fitness for office, have raised the chances of a second Trump presidency materialising, something that would further destabilise global security and increase demand for gold.

Finally, the expansion of the BRICS trading bloc and its stated goal of de-dollarizing global trade has also increased demand for Gold, which is seen as the most realistic replacement for countries denied access to Dollar-denominated markets.

Technical Analysis: Gold breaks above the 50-day SMA

Gold has pierced and closed above the 50-day SMA, indicating a major bullish change in its technical profile.

This further invalidates the head-and-shoulders top pattern that appeared to be completing.

XAU/USD Daily Chart

Gold will now likely rise to the level of $2,369 (the high of June 21). The next target after that is $2,388, the high of June 7.

Alternatively, despite the invalidation of the head-and-shoulders pattern, there is still a smaller chance that a more complex top pattern has formed. If the neckline of the engaged top pattern at $2,279 is broken, a downside reversal may still follow, with a conservative target at $2,171, the ratio of 0.618 of the pattern height extrapolated to the downside.

The trend is now sideways in both the short and medium term. In the long term, Gold remains in an uptrend.