Gold eyes more upside as Middle East tensions improve safe-haven appeal

Gold discovers buying interest as Israel-Hamas tensions underpin risk-off impulse.
US employment growth remained surprisingly upbeat in September.
Strong US NFP data increase the chances of one more interest rate increase from the Fed.

Gold price (XAU/USD) recovers swiftly to around $1,850 as dismal market sentiment propelled by escalating tensions between Israel and Hamas improves the appeal for safe-haven assets. The yellow metal rebounds as the support from deepening geopolitical tensions offset the hit from a surprisingly strong Nonfarm Payrolls (NFP) report for September.

The commentary from Dallas Federal Reserve (Fed) Bank President Lorie Logan has also supported the Gold price. Fed Logan draws less emphasis on raising interest rates further If long-term interest rates remain elevated because of higher-term premiums. About the inflation outlook, Fed Logan cited "Progress on inflation is encouraging but it's too early to be confident it is headed to the Fed's 2% target in a sustainable, timely way."

Strong United States employment growth has prompted bets for one more interest rate increase from the Federal Reserve (Fed) as progress in taming inflation could slow down ahead. Fed Governor Michelle Bowman said over the weekend that she supports further policy-tightening by the central bank to bring down inflation to 2% in a timely manner. Going forward, the US Consumer Price Index (CPI) data will be keenly watched by the market participants.

Daily Digest Market Movers: Gold price recovers further as US Dollar faces pressure

Gold price recovers swiftly after a breakout of the consolidation channel formed in the range of $1,810-1,830 as heightened Middle East clashes improve the appeal for safe-haven assets.
The IMF said it is too early to assess the economic impact of the conflict in Israel and the Gaza Strip.
The precious metal finds buyers’ interest even as US job growth remained surprisingly robust in September.
As per the US NFP report, US employers hired 336K new job-seekers in September, significantly higher than expectations of 170K and the former release of 227K. The Unemployment rate remained steady at 3.8%, while investors anticipated a decline to 3.7%.
On the earnings data front, monthly wages grew at a slower rate of 0.2%. The annualized wage rate decelerated to 4.2% against the estimates and the former release of 4.3%.
A surprisingly upbeat US NFP report has accelerated hawkish Federal Reserve bets. According to the CME Group Fedwatch tool, traders see a 22% chance of the Fed raising interest rates by 25 basis points (bps) to the 5.50%-5.75% range at the next policy meeting. These changes were almost negligible before the official labor market data release. The probability of one more interest rate increase in any of the two remaining monetary policy meetings this 2023 has also risen, to 31%.
The job data for September has confirmed that the US labor demand is resilient, making inflationary pressures above the 2% desired rate a hard nut to crack for Fed policymakers.
Fed Governor Michelle Bowman reiterated this weekend in her remarks at the Connecticut Bankers Association that further policy tightening is appropriate. Bowman said she is willing to support one more interest rate hike at a future policy meeting if incoming data conveys that progress in inflation easing towards 2% has stalled.
Bowman further added that interest rates should remain high after one more hike to achieve the 2% inflation goal in a timely manner.
Going forward, the upcoming consumer inflation data is expected to play a pivotal role in the Fed’s monetary policy for November. The monthly core Consumer Price Index (CPI), which excludes volatile food and Oil prices, is expected to grow at a steady pace of 0.3% in September.
On the US-global relations front, the US Commerce Department added 42 Chinese companies to the government’s export control list for providing support to Moscow’s military and defense industrial base, as reported by Reuters.
To stabilize US-China relations, US President Joe Biden and China’s leader Xi Jinping are planning to meet soon in California, according to several media reports.
The US Dollar Index (DXY) rebounds sharply after correcting to near 106.00 as investors rush to safe-haven assets due to the dismal market mood prompted by the war between Israel and Hamas, which could suck in other Middle East players.
In addition to the risk-off impulse, the hawkish interest rate outlook by Fed policymakers has propelled demand for the US Dollar and Treasuries.
The US markets will remain closed on Monday on account of the Columbus Day holiday.

Technical Analysis: Gold price sees more gains above $1,850

Gold price capitalizes on the Israel-Hamas conflict as the appeal for safe-haven investments improves. The precious metal recovers after a consolidation breakout and is expected to extend recovery to near the 20-day Exponential Moving Average (EMA), which trades around $1,870.00. The broader outlook for Gold price is bearish as the 50-day and 200-day Exponential Moving Averages (EMAs) have delivered a death cross. Momentum oscillators recover after turning to extremely oversold levels.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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