- Gold price falls back marginally from a five-month high as the focus shifts to Fed policy.
- The Fed is widely expected to keep interest rates unchanged due to higher US bond yields.
- Escalating Israel-Palestine war keeps bullions’ demand firmer.
Gold price (XAU/USD) recovered toward a fresh five-month high after a moderate correction. The precious metal slips marginally as investors turn cautious on expectations that the Federal Reserve (Fed) will keep its doors open for further policy tightening and maintain the dialogue of ‘higher for longer interest rates’. The near-term outlook for bullion remains upbeat amid deepening Middle East tensions.
The Israeli army prepares for a ground invasion in Gaza to demolish the Palestinian military while the US keeps urging the former to delay a ground assault as it could impact the hostage situation. Neighboring Jordan warned that Israel’s ground war in Gaza would result in a humanitarian catastrophe of epic proportions. Going forward, investors will look for the UN Security Council meeting to discuss potential solutions for a ceasefire in the Israel-Palestine conflict.
Daily Digest Market Movers: Gold price capitalizes on soft US Dollar
- Gold price resumes an upside journey towards the five-month high near $2,010.00 as investors await the monetary policy decision by the Federal Reserve, which will be announced on Wednesday.
- The near-term demand for the Gold price is upbeat as Middle East tensions keep safe-haven bids firmer.
- The US urged Israel to delay ground invasion in Gaza as it could derail hostage negotiations.
- Investors await the United Nations (UN) Security Council meeting, requested by the UAE, to discuss a potential ground assault by Israel in Gaza, which could lead to plenty of casualties.
- An official from the Palestinian military has requested the immediate implementation of a UN general assembly decision to allow aid to the Gaza strip.
- The US Dollar Index (DXY) consolidates in a tight range as investors keenly await the Fed’s interest rate decision.
- As per the CME Fedwatch tool, traders see the Fed keeping interest rates unchanged at 5.25-5.50% almost certain. The odds of one more interest rate increase in any of the two remaining monetary policy meetings in 2023 have risen to 24% from 20% recorded last week.
- Tight financial conditions due to higher US long-term bond yields, moderately easing price pressures and deepening Middle East tensions are expected to allow Fed policymakers to maintain the status quo consecutively for the second time.
- Cleveland Fed Bank President Loretta Mester said recently that higher bond yields are equivalent to one interest rate hike of 25 basis points (bps). The Fed could use higher Treasury yields as a substitute for further policy tightening.
- 10-year US Treasury yields have risen to 4.85% and are expected to expand further amid budget deficit worries.
- The core Personal Consumption Expenditure (PCE) inflation data released on Friday showed that inflation is broadly stubborn due to robust consumer spending.
- Monthly US core PCE accelerated at an expected pace of 0.3% in September against 0.1% growth in August. The annual core PCE rose by 3.7% but decelerated from the August reading of 3.9%.
- In addition to the Fed’s monetary policy decision, investors would look for ADP Employment Change and the ISM Manufacturing PMI for October, which will be published on Wednesday.
- The release of the US factory data will be of utmost importance. A survey from S&P Global showed last week that the US Manufacturing PMI met the 50.0 threshold for the first time after 11 months. 50 is the threshold distinguishing expansion from contraction. If the US factory data manages to do so, the Fed will probably discuss keeping interest rates higher for a much longer period.
Technical Analysis: Gold price hovers near $2,000
Gold price advances towards a five-month high around $2,010 as investors that the Fed will keep interest rates unchanged in its monetary policy meeting, which will be delivered on Wednesday. The precious metal stabilizes above the crucial resistance of around $1,990, which is now acting as a major support for the Gold bulls. The broader Gold demand outlook turns bullish as the 20-day Exponential Moving Average (EMA) has delivered a bullish crossover above the 50 and 200-day EMAs.
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.
Source: https://www.fxstreet.com/news/gold-price-hovers-near-2-000-as-israel-hamas-war-supports-safe-haven-bet-202310300941