Gold price draws support from hopes for additional Fed rate cuts, stronger USD caps gains
|- Gold price reverses an Asian session dip, though the intraday uptick lacks bullish conviction.
- Geopolitical risks and bets that the Fed will cut rates continue to underpin the XAU/USD.
- Odds for a less aggressive Fed easing boost the USD and cap the upside for the commodity.
Gold price (XAU/USD) attracts some dip-buying on the first day of a new week and trades near a one-week top, around the $2,660 region heading into the European session. The US Producer Price Index (PPI) pointed to a favorable inflation outlook and suggested that the Federal Reserve (Fed) will cut interest rates further. Apart from this, escalating geopolitical tensions in the Middle East turn out to be another factor lending some support to the safe-haven bullion.
Meanwhile, investors have now fully priced out the possibility of another oversized interest rate cut by the US central bank in November. This keeps the US Treasury bond yields elevated and the US Dollar (USD) close to its highest level since mid-August touched last week, capping gains for the Gold price. Furthermore, the optimism led by China's pledge to increase debt to revive its economy warrants some caution before placing fresh bullish bets around the XAU/USD.
Daily Digest Market Movers: Gold price bulls seem reluctant amid a modest USD strength
- The US Bureau of Labor Statistics reported that the headline Producer Price Index (PPI) for final demand rose 1.8% and the core gauge climbed 2.8% on a yearly basis in September.
- The readings were slightly higher than consensus estimates, though pointed to a deceleration in price rise, which should allow the Federal Reserve to continue cutting interest rates.
- According to the CME Group's FedWatch Tool, the markets are currently pricing in over a 90% chance that the Fed will lower borrowing costs by 25 basis points in November.
- The yield on the benchmark 10-year US Government bond, however, holds steady above the 4% threshold amid diminishing odds for a more aggressive policy easing by the Fed.
- This, in turn, assists the US Dollar to stand tall near a two-month peak and turns out to be a key factor that prompts fresh selling around the Gold price on the first day of a new week.
- Government data released over the weekend showed that China's headline Consumer Price Index was flat in September and the yearly rate stood at 0.4%, missing market expectations.
- This, along with the lack of numerical details for China's fiscal stimulus and escalating geopolitical tensions in the Middle East, should offer support to the safe-haven precious metal.
- The US market is closed on Monday for the Columbus Day holiday, leaving the XAU/USD at the mercy of the USD price dynamics and fresh geopolitical developments.
Technical Outlook: Gold price setup favors bulls and supports prospects for additional gains
Any subsequent slide is likely to find some support near the $2,632-2,630 region, below which the Gold price could accelerate the fall towards the $2,600 round-figure mark. A convincing break below the latter will be seen as a fresh trigger for bearish traders and pace the way for some meaningful downfall. The XAU/USD might then drop to the next relevant support near the $2,560 zone and extend the decline towards the $2,535-2,530 region en route to the $2,500 psychological mark.
Meanwhile, positive oscillators on the daily chart favor bullish traders. That said, it will still be prudent to wait for some follow-through buying beyond the $2,660-2,662 horizontal resistance before positioning a further near-term appreciating move. The subsequent move up has the potential to lift the Gold price to an all-time high, around the $2,685-2,686 region touched in September. This is closely followed by the $2,700 round-figure mark, which if cleared decisively will set the stage for an extension of a well-established multi-month-old uptrend.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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