- Gold oscillates in a narrow band during the Asian session on Thursday amid mixed cues.
- Powell’s remarks raised questions about the Fed’s rate-cut path and underpinned the USD.
- Geopolitical risks act as a tailwind for the commodity ahead of important US macro data.
Gold (XAU/USD) struggles to gain any meaningful traction on Thursday and remains confined in a narrow trading band, just below the $3,750 level heading into the European session amid mixed cues. Federal Reserve (Fed) Chair Jerome Powell’s cautious remarks earlier this week might have tempered market expectations for a more aggressive policy easing and capped the upside for the non-yielding yellow metal.
Traders, however, still expect the US central bank to lower borrowing costs again in October and December. This, in turn, fails to assist the US Dollar (USD) to capitalize on the previous day’s strong move up to a two-week top. Moreover, geopolitical tensions contribute to limiting the downside for the safe-haven Gold. Traders now look forward to important US macro releases and Fedspeak for a fresh impetus.
Daily Digest Market Movers: Gold traders opt to wait for this week’s important US macro data
- Federal Reserve (Fed) Chair Jerome Powell’s comments earlier this week pushed the US Dollar to a two-week top and weighed heavily on the non-yielding Gold price on Wednesday. Powell tried to push back against expectations of more interest rate cuts and said that easing too aggressively could leave the inflation job unfinished and necessitate a reversal of course.
- Traders, however, still expect the US central bank to lower borrowing costs again in October and December, following a 25-basis-point rate cut earlier this month. This was the first rate cut since December amid concerns about a softening US labor market. Moreover, the dovish outlook caps any further USD gains and offers some support to the commodity.
- US President Donald Trump escalated his rhetoric against Russia and said on Tuesday that he believes NATO member countries should shoot down Russian aircraft if they enter their airspace. Trump added further that Ukraine, with the support of the European Union and NATO, could win back all of the territory Russia has captured since its invasion.
- This marked a significant shift in Trump’s attitude toward Russia. In response, Kremlin spokesperson Dmitry Peskov declared on Wednesday that Russia would continue its offensive on Ukraine to ensure its interests and achieve its goals. Adding to this, Peskov hit back at Trump’s claim and said that the idea that Ukraine can recapture something is mistaken.
- Trump reportedly promised Arab and Muslim leaders that he would not allow Israeli Prime Minister Benjamin Netanyahu to annex the West Bank. Meanwhile, Iran-backed Houthis forces in Yemen claim responsibility for a drone strike, which hit the Israeli city of Eilat on Wednesday. This keeps geopolitical risks in play and underpins the safe-haven commodity.
- Traders now look forward to important US macro releases and speeches from influential FOMC members for some meaningful impetus. The key focus, meanwhile, will be on the US Personal Consumption Expenditure (PCE) Price Index on Friday, which will play a key role in driving the USD demand and determining the near-term trajectory for the XAU/USD pair.
Gold needs to weaken below $3,700 to back the case for any further corrective decline
From a technical perspective, this week’s failure ahead of the $3,800 mark could be seen as the first sign of a possible bullish exhaustion amid still overbought Relative Strength Index (RSI) on the daily chart. That said, last week’s breakout through the $3,700 mark was seen as a key trigger for the XAU/USD bulls and backs the case for the emergence of some dip-buying near the said handle. A convincing break below the latter, however, might prompt some technical selling and drag the Gold price to the $3,650 intermediate support en route to the $3,610-$3,600 region.
On the flip side, momentum beyond the Asian session high, around the $3,752 area, might confront some resistance near the $3,765-3,766 region. The subsequent move up would set the stage for a move towards retesting the all-time peak, around the $3,790 area. Some follow-through buying and acceptance above the $3,800 mark would set the stage for an extension of the recent well-established uptrend witnessed over the past month 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.