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Gold refreshes three-week high as Fed rate cut bets boost outlook | FXStreet

Gold (XAU/USD) scales higher for the fourth straight day – also marking the fifth day of a positive move in the previous six – and touches a fresh three-week high during the first half of the European session on Thursday. Investors seem convinced that the delayed US macro data will show some weakness in the economy amid a prolonged US government shutdown and prompt the US Federal Reserve (Fed) to lower borrowing costs further in December. This, in turn, is seen as a key factor acting as a tailwind for the non-yielding yellow metal and backs the case for additional gains.

Meanwhile, the optimism led by a positive development to reopen the US federal government remains supportive of a positive risk tone and is holding back traders from placing fresh bullish bets around the safe-haven Gold. Furthermore, a modest US Dollar (USD) uptick might contribute to capping the upside for the commodity. That said, a sustained strength and acceptance above the $4,200 mark favors the XAU/USD bulls. This suggests that the path of least resistance for the bullion is to the upside and any meaningful corrective slide might now be seen as a buying opportunity.

Daily Digest Market Movers: Gold bulls retain control as Fed rate cut bets offset modest USD uptick and positive risk tone

  • The US Senate passed the funding bill to end the longest-running government shutdown, which boosts investors’ confidence and remains supportive of a generally positive risk tone. This, in turn, might hold back the XAU/USD bulls from placing fresh bets, especially after the recent strong rise to an over three-week high, touched on Wednesday.
  • The reopening of the US government shifts market focus back to the deteriorating fiscal outlook and concerns about weakening economic momentum. Economists estimate that the prolonged government closure might have already shaved approximately 1.5 to 2.0% off quarterly GDP growth. This, in turn, keeps the US Dollar bulls on the defensive.
  • Moreover, data from workforce analytics company Revelio Labs released last week showed that 9,100 jobs were lost in October and government payrolls fell by 22,200 positions last month. Furthermore, the Chicago Federal Reserve estimated that the unemployment rate edged up last month, pointing to signs of a deteriorating labor market.
  • Adding to this, investors remain tilted towards a more dovish Fed and have been pricing in around a 60% chance of another 25-basis-point interest rate cut at the December FOMC policy meeting. This, in turn, is seen acting as a headwind for the Greenback and offering some support to the non-yielding Gold heading into the European session on Thursday.
  • Atlanta Fed President Raphael Bostic said on Wednesday that real-time indicators signal the job market in a curious state of balance, and I do not view a severe labor market downturn as the most likely near-term outcome. I see little to suggest price pressures and moving policy lower risks feeding the inflation beast, Bostic added further.
  • Traders will continue to scrutinize speeches from a slew of influential FOMC members for more cues about the Fed’s future rate-cut path. The outlook, in turn, will play a key role in driving demand for the Greenback. Nevertheless, the fundamental backdrop suggests that the path of least resistance for the XAU/USD pair is to the upside.

Gold could extend the momentum towards the next relevant hurdle near the $4,250-4,255 region

From a technical perspective, the XAU/USD pair now seems to have found acceptance above the 61.8% Fibonacci retracement level of the recent corrective decline from the all-time peak, touched in October, and the $4,200 round figure. This, along with positive oscillators on daily/4-hour charts, validates the constructive outlook for the Gold price. Hence, a subsequent strength towards the $4,250-$4,255 region, en route to the $4,285 zone and the $4,300 mark, looks like a distinct possibility.

On the flip side, any meaningful slide below the Asian session low, around the $4,180 region, might now be seen as a buying opportunity. This, in turn, should help limit the downside for the Gold price near the $4,100-$4,095 zone. The latter should act as a key pivotal point, which, if broken, might prompt some technical selling and drag the commodity to the $4,075 region, or the 38.2% Fibo. retracement level, en route to the $4,025 area. Some follow-through selling, leading to a further fall below the $4,000 psychological mark, might shift the near-term bias in favor of bearish traders and pave the way for deeper losses.

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.