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Gold struggles to lure buyers amid bullish USD; downside remains cushioned

  • Gold price kicks off the new week on a weaker note amid sustained USD buying interest. 
  • Bets for smaller Fed rate cuts and deficit-spending concerns push the US bond yields higher.
  • Easing fears of a further escalation of the Israel-Iran conflict undermines the XAU/USD. 

Gold price (XAU/USD) opens with a modest bearish gap at the start of a new week and erodes a part of Friday’s positive move back closer to the $2,748-2,750 supply zone. Firming expectations for a less aggressive policy easing by the Federal Reserve (Fed), along with deficit-spending concerns after the US election, triggers a fresh leg up in the US Treasury bond yields. This, in turn, lifts the US Dollar (USD) to a fresh high since July 30 and is seen driving flows away from the non-yielding yellow metal.

Moreover, a generally positive risk tone turns out to be another factor exerting some downward pressure on the Gold price, though any meaningful corrective decline still seems elusive. Safe-haven demand stemming from Middle East tensions and US election jitters might offer support to the XAU/USD. Traders might also prefer to wait for this week’s important US macro data – the Advance Q3 GDP print, the Personal Consumption Expenditures (PCE) Price Index and the Nonfarm Payrolls (NFP) report. 

Daily Digest Market Movers: Gold price remains depressed amid sustained USD buying and elevated US bond yields

  • The US Dollar added to its recent strong gains registered over the past four weeks and climbed to its highest level since July 30 amid bets for a less aggressive policy easing by the Federal Reserve. 
  • According to the CME Group’s FedWatch Tool, the markets have nearly fully priced in the possibility of a regular 25 basis points rate cut by the US central bank at its November policy meeting. 
  • The latest poll indicates a tight race between Vice President Kamala Harris and the Republican nominee Donald Trump amid deficit-spending concerns after the November 5 US presidential election.
  • Moreover, the US macro releases on Friday added to a string of recent upbeat data and suggested that the economy remains on strong footing, validating market bets for smaller Fed rate cuts.
  • The US Census Bureau reported that Durable Goods Orders in the US declined by 0.8% in September, lower than the 1% fall expected, while new orders excluding transportation increased by 0.4%. 
  • Adding to this, the University of Michigan’s Consumer Sentiment Index reached a six-month high of 70.5 in October, better than both the preliminary result and the previous month’s reading. 
  • The yield on the benchmark 10-year US government bond stands firm near a three-month high touched last week, which is seen benefiting the USD and weighing on the non-yielding precious metal. 
  • Iran on Saturday indicated that it would not retaliate against Israeli strikes on military targets across its territory if a deal is reached for a ceasefire agreement in the Gaza Strip and Lebanon. 
  • China’s Vice Minister of Finance, Liao Min, said on Monday that the country will step up countercyclical adjustments of its macro policies to bolster economic recovery in the fourth quarter.

Technical Outlook: Gold price extends its consolidative price move beyond the all-time peak touched last week

From a technical perspective, last week’s repeated failures to find acceptance or build on momentum beyond the $2,748-2,750 area warrant some caution for bullish traders. Moreover, the recent range-bound price action witnessed over the past week or so points to indecision among traders over the next leg of a directional move. Hence, it will be prudent to wait for a sustained strength beyond the said barrier or a convincing break below the short-term trading range support near the $2,720-2,715 zone, before positioning for a firm near-term trajectory. 

Meanwhile, some follow-through buying beyond the $2,748-2,750 region should allow the Gold price to retest the all-time peak, around the $2,658-2,659 area touched earlier this month. The subsequent move up could lift the XAU/USD towards the $2,770 zone, representing a nearly four-month-old ascending trend-line resistance, en route to the $2,800 round-figure mark.

On the flip side, weakness below the $2,720-2,715 region is likely to find decent support near the $2,700 mark, which if broken decisively should pave the way for deeper losses. The gold price might then accelerate the corrective fall towards intermediate support near the $2,675 area and eventually drop to the $2,657-2,655 horizontal support.

US Dollar FAQs

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

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