Spot gold prices experienced a slight rebound on Wednesday, August 9, following Moody’s downgrade of Bank of America’s rating. However, investors remained cautious as they awaited the release of U.S. inflation data, causing gold prices to eventually give up all of their intraday gains. The upcoming inflation data was seen as crucial in shaping the Federal Reserve’s monetary policy outlook.
At 19:39 Beijing time, spot gold fell marginally by 0.01% to $1,924.92 per ounce, while the main COMEX gold futures contract also dropped by 0.06% to $1,958.8 per ounce. The U.S. dollar index fell by 0.10% to 102.444.
Moody’s downgrade of Bank of America’s rating added to concerns about the overall health of the world‘s largest economy, which in turn supported the price of gold. Moody’s rationale for the downgrade was based on the increasing financial risks and stress that could potentially weaken the profitability of smaller and mid-sized U.S. banks. The report highlighted ongoing problems in the banking sector, including the risk of depositors withdrawing their funds and the current higher interest rate environment reducing lenders’ investments.
Moreover, Moody’s draw attention to the banking crisis that occurred earlier this year, which saw the sudden collapse of the 16th largest bank in the United States, Silicon Valley Bank. This event triggered concerns about the solvency of other banks and led to a loss of investor confidence.
Looking ahead, market experts predict that the U.S. Consumer Price Index (CPI) for July, set to be released on August 10, will show a likely rise. They anticipate an increase of 0.3 percentage points to 3.3% for the overall CPI annual rate. The core CPI annual rate, however, is expected to remain unchanged at 4.8% from the previous value. These projections are based on the anticipation of a rebound in headline CPI as a result of higher oil prices driving up gasoline prices.
Economists at Commerzbank believe that for gold to regain an upward trajectory, market expectations of interest rate hikes must diminish. They expect this to occur in the fourth quarter, and therefore anticipate gold to remain above $1,900 in the short term before rising to $2,000 by the end of the year.
Philadelphia Fed President Harker expressed the view that the Fed may be at a stage where it can keep interest rates unchanged, unless there is a sudden change in recent economic data. Harker, like other Fed officials, welcomed the recent data showing a sharp retreat in inflation from its four-decade highs a year ago. He expressed optimism about a modest economic slowdown and a slow but sure deflation, forecasting a soft landing for the U.S. economy.
However, there are concerns about the prospect of delayed or downgraded Fed rate cut expectations. Baden Moore, head of carbon and commodity strategy at National Australia Bank, remains cautious and believes that increased certainty of U.S. rate cuts in 2024 is necessary for sustained market recovery. Ulrich Leuchtmann, head of foreign exchange and commodity research at Commerzbank, argued that the U.S. economy remains resilient to headwinds and therefore capital spending in the U.S. is more profitable in the long run, making the dollar more popular and expensive.
Technically, on the hourly chart, gold prices have been within a downward convergent wedge since the end of July. If the upper edge of the wedge cannot be effectively breached, the market outlook suggests a potential fall below $1,920. However, for a new upward trend to begin, gold prices must surpass the neckline at $1,947.
In conclusion, spot gold prices experienced a brief rebound following Moody’s downgrade of Bank of America’s rating. Investors await the release of U.S. inflation data, which will influence the Federal Reserve’s monetary policy outlook. The market remains cautious, and gold prices may face further downward pressure unless the upper edge of the wedge is effectively breached.