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Gold overbought RSI warrants caution for bulls amid renewed USD buying interest

  • Gold price prolongs its upward trajectory and touches a fresh record high on Monday.
  • Major central banks remain in rate-cut mode and continue to benefit the XAU/USD.
  • Middle East tensions and US political uncertainty further underpin the precious metal.

Gold price (XAU/USD) sticks to its intraday gains through the early part of the European session and is currently placed near the all-time peak, around the $2,730 region. The easing monetary policy environment, along with persistent geopolitical risks stemming from the ongoing conflicts in the Middle East, continues to benefit the non-yielding yellow metal. Apart from this, the US political uncertainty is seen as another factor that contributes to the recent upswing witnessed over the past two weeks or so. 

Meanwhile, expectations that the Federal Reserve (Fed) will proceed with modest rate cuts remain supportive of elevated US Treasury bond yields and assist the US Dollar in attracting some dip-buying at the start of a new week. In fact, the USD Index (DXY), which tracks the Greenback against a basket of currencies, moves back closer to its highest level since early August touched last week. This, along with slightly overbought conditions on the daily chart, might cap any further gains for the Gold price. 

Daily Digest Market Movers: Gold price uptrend seems rather unaffected by resurgent USD demand

  • A combination of supporting factors assists the Gold price to prolong its recent well-established uptrend and touch a fresh all-time peak during the Asian session on Monday.
  • Tensions and conflicts in the Middle East show no signs of abating despite the killing of Hamas leader Yahya Sinwar as Israel prepares to respond to Iran’s early-October strike. 
  • Israel’s Prime Minister Benjamin Netanyahu said that the attack on his private residence by Iran’s  Lebanese proxy Hezbollah would not deter him from continuing the war.
  • The Israeli army launched a series of air strikes across Lebanon and also intensified attacks across Gaza, raising the risk of a full-blown regional war in the Middle East. 
  • Recent polls indicate a close contest between Donald Trump and Vice President Kamala Harris, adding a layer of uncertainty and benefiting the safe-haven XAU/USD.
  • The European Central Bank last week decided to lower interest rates for the third time this year – marking the first back-to-back rate cut in 13 years – and eyes more cuts. 
  • The Federal Reserve is also anticipated to lower borrowing costs further, while weak inflation data from the UK solidified bets for a more aggressive easing by the Bank of England. 
  • Investors have fully priced out the possibility of another jumbo interest rate cut by the Fed in November as the incoming macro data continue to point to a resilient US economy. 
  • Atlanta Fed President Raphael Bostic said that he is not in a rush to cut rates and see the case for a reduction in the policy rate to somewhere between 3% and 3.5% by the end of next year.
  • The yield on the benchmark 10-year US government bond holds above 4% and acts as a tailwind for the USD, albeit does little to hinder the commodity’s positive move.
  • Investors continue to cheer the launch of two funding schemes on Friday by the People’s Bank of China aimed at supporting the development of capital markets. 

Technical Outlook: Gold price bulls not ready to give up yet, breakout above $2,700 remains in play

From a technical perspective, last week’s sustained strength and close above the $2,700 mark could be seen as a fresh trigger for bullish traders. That said, the Relative Strength Index (RSI) on the daily chart has moved beyond the 70 mark, flashing slightly overbought conditions. This, in turn, makes it prudent to wait for some near-term consolidation or a modest pullback before positioning for an extension of the recent well-established uptrend. 

Meanwhile, the $2,700 round figure now seems to protect the immediate downside, below which the Gold price could accelerate the corrective decline towards the $2,662-2,660 zone. The next relevant support is pegged near the $2,647-2,646 area. A convincing break below the latter might prompt some technical selling and expose the $2,600 mark with some intermediate support near the $2,630 region.

Risk sentiment FAQs

In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.

Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.

The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.

The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.