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Gold edges lower on firmer US Dollar, geopolitical risks might cap its downside

  • Gold price attracted some haven flows on Wednesday amid rising tensions in the Middle East. 
  • Reduced bets for aggressive Fed rate cuts and stronger USD capped gains for the XAU/USD. 
  • Traders now look to the US ADP report for a fresh impetus ahead of the US NFP on Friday.

Gold price (XAU/USD) ticks lower during the early European session on Wednesday and erodes a part of the previous day’s strong gains of over 1%, triggered by a further escalation of geopolitical tensions in the Middle East. Fears of a full-blown war in the region escalated after Iran fired ballistic missiles at Israel, which, in turn, boosted demand for the safe-haven precious metal. That said, diminishing odds for a more aggressive policy easing by the Federal Reserve (Fed) fail to assist the non-yielding yellow metal to capitalize on the move. 

Meanwhile, the US Dollar (USD), so far, has managed to preserve its recovery gains registered over the past two days amid signs of a still resilience US labor market and further contributes to capping the upside for the Gold price. Nevertheless, the XAU/USD remains within striking distance of the all-time peak touched last week and the fundamental backdrop favors bulls. Traders now look to the US ADP report on private-sector employment for some impetus, though the focus remains glued to the Nonfarm Payrolls report on Friday. 

Daily Digest Market Movers: Gold price might continue to draw support from rising Middle East tensions

  • Iran fired a barrage of ballistic missiles at Israel on Tuesday in retaliation to the latter’s aggression in Lebanon against the Iran-backed armed movement, Hezbollah, and helped revive demand for the safe-haven Gold price. 
  • Israeli Prime Minister Benjamin Netanyahu promised that Iran would pay for its missile attack, while Iran said any retaliation would be met with vast destruction, raising the risk of a broader conflict in the Middle East.
  • The Job Openings and Labor Turnover Survey (JOLTS) published by the US Bureau of Labor Statistics (BLS) showed that the number of job openings unexpectedly increased in August and stood at 8.04 million. 
  • Separately, the Institute for Supply Management (ISM) reported that its Manufacturing PMI remained unchanged at 47.2 in September, pointing to a contraction in the business activity for the sixth straight month.
  • Investors are still assessing the likelihood of another 50 basis points interest rate cut by the US central bank in November after the Federal Reserve Chair Jerome Powell’s relatively hawkish comments on Monday. 
  • Powell said that he sees two more 25 bps rate cuts this year as a baseline if the economy performs as expected, though the CME Group’s FedWatch Tool indicates over a 35% chance of a supersized rate cut next month. 
  • Atlanta Fed President Raphael Bostic noted on Tuesday that the US central bank should be willing to explore more outsized rate cuts if the jobs market deteriorates and the PCE data show disinflation still on track.
  • Market participants now look forward to the US ADP report, which is expected to show that private-sector employers added 120K jobs in September as compared to the 99K previous, for short-term opportunities.
  • The focus, however, will remain glued to the closely-watched official monthly employment details, popularly known as the Nonfarm Payrolls (NFP) report, which should provide a fresh directional impetus. 

Technical Outlook: Gold price dips towards the $2,625-2,624 pivotal support could be seen as buying opportunity

From a technical perspective, the overnight strong move-up reinforced a short-term ascending channel resistance breakpoint, turning support near the $2,625-2,624 region. The said area should now act as a key pivotal point, which if broken decisively might prompt some technical selling. The subsequent downfall could drag the Gold price below the $2,600 mark, towards the next relevant support near the $2,560 zone en route to the $2,535-2,530 region.

On the flip side, the $2,672-$2,673 area might continue to offer immediate resistance ahead of the $2,685-2,686 zone, or the all-time peak touched last week. This is closely followed by the $2,700 mark, which if conquered will be seen as a fresh trigger for bullish traders and set the stage for an extension of a well-established multi-month-old uptrend.

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.