Gold (XAU/USD) extends its intraday retracement slide from the vicinity of the all-time peak and slides below the $4,320 level heading into the European session on Tuesday, though it lacks follow-through selling. The US Dollar (USD) attracts buyers for the third straight day and turns out to be a key factor exerting downward pressure on the commodity. Furthermore, a generally positive tone around the equity markets contributes to driving flows away from the safe-haven precious metal.
Meanwhile, investors remain worried about economic risks stemming from a prolonged US government shutdown, trade-related uncertainties and geopolitical tensions. This, along with dovish Federal Reserve (Fed) expectations, might keep a lid on any further USD appreciation and lend support to the on-yielding Gold. Hence, it will be prudent to wait for strong follow-through selling before confirming that the XAU/USD pair has topped out and positioning for a deeper corrective decline.
Daily Digest Market Movers: Gold is undermined by firmer USD and positive risk tone
- The US Dollar attracts some buyers for the third consecutive day and exerts some downward pressure on the Gold price during the Asian session on Tuesday. Moreover, the global risk sentiment remains well supported by signs of easing US-China trade tensions and turns out to be another factor undermining the safe-haven precious metal.
- US President Donald Trump said on Friday that a full-scale tariff on China would be unsustainable. Trump added on Sunday that said that both countries would strike a fantastic deal, though he warned that failure to reach an agreement could see China face potential tariffs of 155%. This keeps focus squarely on US-China trade talks next week.
- According to the CME Group’s FedWatch Tool, traders have nearly fully priced in a 25-basis-points rate cut at each of the US Federal Reserve’s policy meetings in October and in December. This might keep a lid on any meaningful USD appreciating move and continue to act as a tailwind for the non-yielding yellow metal amid economic risks.
- Investors seem worried that a prolonged US government closure would affect the economic performance. The Senate voted against reopening the US government for the 11th time on Monday, extending the shutdown to a third week as both sides remain deadlocked. Trump accused the opposition of blocking efforts to curb illegal immigration.
- Russian President Vladimir Putin reportedly reiterated his demand that Ukraine give up all of Donetsk Oblast as a condition for ending the war, and suggested that Russia would be willing to surrender parts of occupied southern Ukraine. Adding to this, Trump said on Sunday that the battle lines should be frozen where they currently stand.
- Ukrainian President Volodymyr Zelenskyy, however, has repeatedly rejected the idea of forfeiting the Donbas, or any other occupied ground, to Russia. This keeps geopolitical risks in play, which should further extend some support to the safe-haven precious metal and contribute to limiting any meaningful corrective pullback.
- Traders might also opt to wait for the release of the latest US consumer inflation figures on Friday, which might provide some cues about the Fed’s rate-cut path. This, in turn, will play a key role in influencing the USD price dynamics and driving the XAU/USD pair ahead of the crucial two-day FOMC policy meeting starting next Tuesday.
Gold needs to find acceptance below $4,300 to back the case for further corrective decline
The precious metal has been facing difficulty in building on its recent well-established uptrend beyond the $4,375-4,380 zone. Given that the daily Relative Strength Index (RSI) is still flashing extremely overbought conditions, the repeated failures near the said region could be seen as the first sign of a bullish exhaustion. Any subsequent fall below the $4,330 area, however, is likely to attract some buyers and remain cushioned near the $4,300 mark. A convincing break below the latter might prompt some technical selling and make the Gold price vulnerable to accelerate the corrective fall towards the $4,240 intermediate support en route to the $4,210-4,200 region.
On the flip side, bulls might wait for a sustained move beyond the $4,375-4,380 region before placing fresh bets. A subsequent strength beyond the $4,400 round figure will mark a fresh breakout for the Gold price and pave the way for an extension of a well-established uptrend witnessed over the past two months or so.
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.