Technically speaking, the US is currently within a recession as the economy has declined for more than 2 quarters. This is, of course, not something unique to the States - most global economies are either at a high risk of seeing a recession or currently experiencing one. The UK is the latest economy to confirm that their GDP has declined again. This morning, the UK’s GDP figure declined by 0.3% which is a sharper decline than expected.
The US has, so far, maintained that the economy is not actually within a recession due to certain positive factors such as the employment sector. This is something we have heard from the President, the Treasury and even the Federal Reserves. Though traders should note that employment figures are a “lagging indicator”, in other words one of the last figures to reflect recession.
Yesterday evening the US President admitted, for the first time, that the US economy is heading for a slight recession. This is now putting the White House in line with economists’ predictions. Citibank was the first investment bank to advise that their views align with Biden’s. According to Citi’s US economist, Veronica Clark, the organization believes that the US economy will witness a recession at the very beginning of 2023 and will most likely see the unemployment rate rise to 5.5%. This is, of course, likely to strongly affect the US Dollar, US equities and correlated assets such as gold.
During this morning’s Asian session, US equities have slightly risen but remain within the current price range which formed over the past 24 hours. The above news is not necessarily positive for investor confidence and risk appetite.
XAU/USD
The price of the XAU/USD has slightly risen this morning despite being under pressure over the past week due to the appreciating US Dollar. The 0.31% rise this morning is currently not showing any major indication of stronger bullish price movements. However, the price has managed to a clear support level at $1,661 which can be used as a sell indication throughout the day if the price manages to form a bearish breakout.
XAU/USD 1-hour chart on October 12th
The price movement of the instrument is being influenced by two opposing factors. Firstly, the price is being pressured by the US Dollar as previously mentioned. Secondly, rising interest rate hikes have the ability to lower the demand for gold as well. The Consumer Price Index (CPI) which is scheduled for tomorrow will most likely shed some light on the possible stance to be taken by the Fed over the next 2 months.
Also, the price of gold is negatively affected by the growing yield of US bonds, which are also considered as “safe haven assets”. Bond rates rose by a noticeable 2% over the past week, which makes them more attractive to investors looking to mitigate risk.
On the other hand, we also have potential elements within the market which may support prices in the longer term. However, traders should note that it is also important to obtain confirmation from price analysis. The current risk of a recession is a serious price driver for XAU/USD. A recession is known to spark a sharp decline in investor confidence due to lower economic activity and higher unemployment. As a result, more investors turn to gold.
If a recession does become reality along with higher unemployment, it may potentially spark support for gold. This morning, the technology giant Intel Corp advised that they plan to cut personnel by up to 20%. According to company officials, the firm has seen a drop in sales and also predicts weaker economic activity over the next 12 months. This is the first company to advise a major cut in personnel, but many doubt they will be the last.
Quick Summary:
- UK GDP declines by 0.3% which is sharper than expected.
- US President admits for the first time that the country is heading for a slight recession.
- Surprisingly, US equities rose slightly but are still trading within a range.
- Gold climbs 0.31% but shows no signs of further bullish movements as it continues to experience pressure from a rising USD.
- Tomorrow’s CPI is expected to shed light on the Fed’s likely stance in the next couple of months.
- Intel Corp to cut staff by up to 20% in light of predicted recession.
