Gold (XAU/USD) edges higher at the start of a new week and, for now, seems to have stalled its sharp retracement slide from the all-time peak, touched on Friday. Persistent trade-related uncertainties, rising geopolitical risks, and concerns that a prolonged US government shutdown would affect the economic performance continue to act as a tailwind for the safe-haven precious metal. Furthermore, dovish Federal Reserve (Fed) expectations underpin demand for the non-yielding yellow metal.
In fact, traders have fully priced in two more interest rate cuts by the US central bank this year, which fails to assist the US Dollar (USD) to capitalize on Friday’s modest bounce. This, along with global fiscal concerns, central bank buying, and strong inflows into exchange-traded funds (ETFs), turns out to be another factor acting as a tailwind for Gold. Meanwhile, US President Donald Trump’s comment on Friday eased concerns about an all-out US-China trade war and might cap the commodity.
Daily Digest Market Movers: Gold bulls seem non-committed despite supportive factors
- US President Donald Trump said on Friday that a full-scale tariff on China would be unsustainable and also confirmed a meeting with his Chinese counterpart. This, in turn, prompted some profit-taking around the safe-haven Gold, though the corrective slide lacked any follow-through.
- Investors remain worried about economic risks stemming from rising geopolitical tensions and the US government shutdown. Adding to this, concerns over fiscal discipline and mounting government debt, particularly in the US, act as a tailwind for the safe-haven precious metal.
- Ukrainian drones struck a gas processing plant run by the state-owned Gazprom company in southern Russia. A separate drone strike hit Russia’s Novokuibyshevsk oil refinery in the Samara region near Orenburg. This keeps the risk of a further escalation of the Russia-Ukraine war.
- Meanwhile, the federal government shutdown has now stretched into its 20th day, with Republicans locked in a standoff with Democrats over health care subsidies. The Senate is preparing for its 11th vote on the stopgap funding bill later this Monday amid the still unresolved impasse.
- According to the CME Group’s FedWatch Tool, traders have fully priced in a 25-basis-point rate cut at each of the US Federal Reserve’s policy meetings in October and in December. This keeps a lid on the US Dollar’s recovery on Friday and further supports the non-yielding yellow metal.
- As the October FOMC policy meeting looms, Fed officials have entered a blackout period, leaving the USD at the mercy of trade-related developments. Traders might also opt to move to the sidelines ahead of the latest US consumer inflation figures, due for release on Friday.
Gold seems poised to appreciate further while above $4,210-4,200 confluence support
From a technical perspective, the XAU/USD pair showed some resilience below the $4,210-$4,200 confluence on Friday – comprising the 100-hour Simple Moving Average (SMA) and the 38.2% Fibonacci retracement level of the October 9-17 rally. The subsequent move up, however, faces a hurdle near the 23.6% Fibo. retracement level, around the $4,275 region. The latter should now act as a pivotal point for intraday traders, above which the Gold could climb further beyond the $4,300 mark, towards the $4,325 horizontal resistance. The momentum could extend further towards retesting the all-time peak, around the $4,379-4,380 zone, touched on Friday.
On the flip side, the Asian session trough, around the $4,219-4,218 region could offer support to the XAU/USD pair ahead of the $4,200 round figure and Friday’s swing low, around the $4,186 zone. Some follow-through selling below the $4,163-4,162 area, or the 50% retracement level, could make the Gold price vulnerable to accelerate the fall towards the $4,100 mark. The latter coincides with the 61.8% Fibo. retracement level, which, if broken decisively, will suggest that the commodity has topped out and pave the way for a deeper corrective decline.
Fed FAQs
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.
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.
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.
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.
