- Gold price attracts some haven flows amid the risk-off mood and Middle East tensions.
- Sliding US bond yields contribute to driving flows towards the non-yielding yellow metal.
- Bets for smaller rate cuts by the Fed underpin the USD losses and might cap the XAU/USD.
Gold price (XAU/USD) trades with a positive bias for the second straight day and sticks to its intraday gains near the $2,675 area, or a three-week peak through the first half of the European session on Wednesday. Against the backdrop of persistent geopolitical risks, the disappointment over the lack of details about China's fiscal stimulus temper investors' appetite for riskier assets. This is evident from a weaker tone around the equity markets and turns out to be a key factor benefiting the safe-haven precious metal.
Meanwhile, the anti-risk flow leads to a further decline in the US Treasury bond yields and lends additional support to the non-yielding Gold price. That said, firming expectations for a less aggressive policy easing by the Federal Reserve (Fed) and bets for a regular 25 basis points (bps) rate cut in November should act as a tailwind for the US bond yields. This, in turn, lifts the US Dollar (USD) to its highest level in more than two months and might hold back bullish traders from placing fresh bets around the commodity.
Daily Digest Market Movers: Gold price benefit from risk-off impulse, despite bullish USD
- US Treasury bond yields fell for a second day on Tuesday as traders reacted to weaker-than-expected manufacturing data and easing inflation risks on the back of fall oil prices, boosting demand for the non-yielding Gold price.
- The New York Federal Reserve's Empire State Manufacturing Index fell following a surge to a 29-month high in September, to -11.9 in October, marking the weakest reading since May and indicating deteriorating conditions.
- Easing fears of a supply disruption, along with a weaker demand outlook, drag Crude Oil prices to a two-week low, which is expected to reduce inflationary pressures and allow the US central bank to cut interest rates further.
- The markets, however, are pricing in a greater possibility of a smaller interest rate cut at the next FOMC policy meeting in November, which should underpin the US Dollar and keep a lid on any further gains for the XAU/USD.
- Meanwhile, San Francisco Fed President Mary Daly noted on Tuesday that the US central bank has made significant progress on tamping down inflation and sees one or two more rate cuts this year if economic forecasts are met.
- Separately, Atlanta Fed President Raphael Bostic said that he doesn't see strong signs of a potential recession looming over the horizon as the US economy continues to perform well and that the inflation is heading back to 2%.
- On Tuesday, Israeli Prime Minister Benjamin Netanyahu rejected the idea of a ceasefire in Lebanon, while the militant group Hezbollah threatened to widen its attacks, raising the risk of a further escalation of the conflict.
- The Biden administration has warned Israel that it faces possible punishment, including the potential stopping of US weapons transfers if it does not take immediate action to let more humanitarian aid into Gaza.
- The market attention will be on the US economic releases – Monthly Retail Sales, Industrial Production, and the usual Weekly Initial Jobless Claims – and the Chinese macro data dump due later this week.
Technical Outlook: Gold price bulls not ready to give up, might aim to conquer the $2,700 mark
From a technical perspective, any subsequent move up is likely to confront some resistance near the $2,685-2,686 region, or the
all-time peak 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 amid positive oscillators on the daily chart.
On the flip side, immediate support is pegged near the $2,650 area, below which the Gold price could slide to the $2,632-2,630 region. Any further decline is likely to attract some buyers and remain limited near the $2,600 round-figure mark. The latter should act as a key pivotal point, which if broken decisively might prompt some technical selling and pave the way for deeper losses.
(An earlier version of this story was corrected on October 16 at 06:48 GMT to say, in the second bullet, that the pair is XAU/USD, not XUA/USD.)
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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