Gold (XAU/USD) attracts some sellers during the Asian session on Wednesday and for now, seems to have snapped a three-day winning streak to the $4,150-4,155 region, or a three-week high touched the previous day. A positive development towards reopening the US government remains supportive of the risk-on mood and acts as a headwind for the safe-haven precious metal. Apart from this, a goodish pickup in the US Dollar (USD) demand turns out to be another factor exerting some pressure on the commodity.
Any meaningful USD appreciation, however, seems elusive amid expectations that an economic fallout from a prolonged US government shutdown might prompt the Federal Reserve (Fed) to lower borrowing costs further in December. This might hold back traders from placing aggressive bearish bets around the non-yielding Gold and help limit deeper losses. Investors might also opt to wait for speeches from a slew of influential FOMC members later this Wednesday for more cues about the Fed’s future rate-cut path.
Daily Digest Market Movers: Gold bulls turn cautious amid receding safe-haven demand
- 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.
- The resumption of normal data flow would reinforce that expectation — especially after last week’s weaker-than-expected US employment and consumer sentiment indicators. Moreover, traders continue to assign a meaningful probability for a rate cut by the US Federal Reserve next month.
- Data from workforce analytics company Revelio Labs showed last week that 9,100 jobs were lost in October, and government payrolls fell by 22,200 positions. Moreover, the Chicago Fed estimated that the unemployment rate edged up last month, pointing to a deteriorating labor market.
- This reaffirmed dovish Fed expectations and dragged the US Dollar to a nearly two-week low on Tuesday, assisting the non-yielding Gold to build on its breakout momentum beyond the $4,100 mark. However, the upbeat market mood acts as a headwind for the safe-haven commodity.
Gold might continue to attract some dip-buyers and find decent support near $4,100
From a technical perspective, the XAU/USD pair seems to struggle to build on its strength beyond the 50% retracement level of the recent sharp corrective decline from the all-time peak, touched in October. However, positive oscillators on daily/4-hour charts favor bullish traders. Some follow-through buying beyond the $4,150-4,155 zone will reaffirm the constructive outlook and allow the Gold price to reclaim the $4,200 mark. The said handle nears the 61.8% Fibonacci retracement level, which, if cleared decisively, should pave the way for a further near-term appreciating move.
On the flip side, the overnight swing low, around the $4,100-4,095 region, could offer immediate support ahead of the $4,075 region, or the 38.2% Fibo. retracement level. A convincing break below the latter might prompt some technical selling and drag the Gold price to the $4,025 region en route to the $4,000 psychological mark. Some follow-through selling might shift the near-term bias in favor of bearish traders. The XAU/USD pair might then accelerate the fall towards the $3,936-3,935 region before eventually dropping to the $3,900 round figure.
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.