Gold Price Slips, But Fed Pause Expectations Offer Support Amid China Stimulus Hopes

Introduction

Gold prices have seen a mild dip for the second consecutive day, but this modest retreat lacks strong momentum. The XAU/USD pair currently hovers just below the $1,940 mark, showing a marginal decline of less than 0.10% for the day. Several factors are at play, influencing the precious metal’s movement in the market.

Fed’s Steadfastness Amidst Labor Market Changes

Despite indications of an improving labor market in the United States, the Federal Reserve (Fed) is widely anticipated to maintain higher interest rates for an extended period. Market expectations still include the possibility of another 25 basis points rate increase by year-end. This outlook underpins elevated US Treasury bond yields, lending support to the US Dollar (USD) and exerting downward pressure on the non-yielding gold price.

China’s Stimulus Measures Weigh In

A prevailing positive sentiment in the market, driven by hopes of China announcing additional stimulus to prop up a slowing economic recovery, is diminishing the demand for the safe-haven asset, XAU/USD. Notably, last week, China injected more local dollar liquidity and relaxed some mortgage rules to bolster its ailing property sector. Additionally, China’s Country Garden Holdings struck a deal to defer some payments that were due over the weekend.

Further reinforcing this sentiment, China’s National Development and Reform Commission (NDRC) announced its intent to establish a dedicated department to support the country’s struggling private economy. This development boosts investor confidence and sustains optimism within equity markets. Despite these factors, the downside for gold prices is cushioned by the expectation that the Fed is approaching the conclusion of its rate-hiking cycle.

In fact, the US central bank is widely anticipated to leave interest rates unchanged during its September policy meeting. This sentiment was bolstered by mixed US employment data. Although the headline Nonfarm Payrolls (NFP) report exceeded expectations, it was offset by a downward revision of the previous month’s figures and an unexpected uptick in the unemployment rate. Furthermore, Average Hourly Earnings saw a slight dip from 4.4% to 4.3% on a yearly basis, indicating a marginal deterioration in the labor market.

These factors collectively limit the Fed’s ability to continue raising interest rates, which, in turn, restrains USD bulls from taking aggressive positions and provides tailwinds for gold priced in US Dollars. Therefore, it is prudent to await stronger follow-through selling before confirming that the recent rebound from the $1,885 region, marking the lowest level since March 13, has fully concluded. This cautious approach suggests waiting for more confirmation before adopting a decidedly bearish stance on XAU/USD.

Conclusion

Gold prices are experiencing a minor setback in their recent upward trajectory. The balance between Fed pause expectations and optimism surrounding China’s stimulus measures creates an environment of uncertainty for the precious metal. As events unfold, market participants will closely watch for stronger indications before making decisive moves in the XAU/USD pair.